Growth of New Car Inventories Is Bringing Back Competition and Lower Prices

Competition is a consumer's best friend, whether you're buying a loaf of bread, a house, or a new car. This is especially true for products like new cars. All new Ford F150s, Honda Accords, and Toyota Corollas (of a specific model) are identical. As you probably know, new car dealers of all makes charge different prices. Furthermore, any given new car dealer charges every customer a different price for identical cars!

The reason that new car prices have been at all-time, historic highs for the past 3 years is that supply dropped precipitously, causing demand to drive prices thousands of dollars above the MSRP (manufacturer's suggested retail price). If a customer walked into a Kia dealer's showroom and wanted to buy the only new Telluride in inventory (with no more expected anytime soon), the salesman could easily get $10,000 or more over the MSRP, if not from the current customer, then from the next one walking in the door.

It's important for new car buyers to understand that, to a Chevy dealer, Ford or Honda isn't the competition; it's the other, nearest Chevy dealer. If you try to negotiate a lower price on a new Jeep Wrangler by showing the salesman what a good price you got on a Ford Bronco, they'll just tell you about the "superior" features and benefits of Wranglers over Broncos. But, if you say that the Jeep dealer minutes away beat their price by $2,000, you'll get their attention and probably a much lower price.

State laws in all fifty states allow only franchised new car dealers to sell new cars. (Tesla, Lucid, and a few other exclusive EV manufacturers have been able to dodge this law in most states.) For years, auto manufacturers have oversaturated prime markets with new car dealerships. Car dealerships are almost as numerous as gas stations and bank branches – it seems like there's one on every street corner.

Then, along came the Internet and the birth of online buying. A buyer can now shop a dozen stores for the best price in the time it used to take to shop at one store.

Consequently, in "normal times," a shrewd shopper and negotiator could buy a new car at a very low price – sometimes, albeit rarely, at or below the dealer's true cost. Of course, a car dealer can't remain in business very long if they sell their cars at or below cost. That's why new car dealers take advantage of buyers who aren't sophisticated negotiators. The breakeven price on a new car includes all costs, not just the cost of the car, such as advertising, sales commission, utility bills, building lease payments, etc. Before the pandemic and the supply chain interruption, most car dealers broke even or lost money in their new car departments. They had to make it back in their service, used car, and parts departments.

This is why buying a new car has always been such an unpleasant experience. In order to not lose too much money in their new car department, dealers felt they had no choice but to take enormous advantage of those who weren't smart shoppers (the majority). I refer to these buyers as the "victims" - the very young (buying their first car), the very old (often widows who had relied on their husbands), those whose first language isn't English, and the uneducated. By selling an elderly widow a new car at $10,000 above MSRP, the dealer was able to average out their new car profits with the shrewd, sophisticated attorney who bought their new car at dead cost.

Bear in mind that we're not back to normal yet, but we're getting there. Whatever the "new normal" will be, I believe it should happen by the end of 2023. I expect there to be higher prices than three years ago, but nowhere near as high as last year. Dealers will inventory fewer new cars, and more people will order their cars rather than pick from dealers' inventories.

Unfortunately, the "victims" will still be exploited, but those who can shop extensively online for the lowest price and agree to order the exact new car they want will pay much lower prices for their cars.

Leasing a Car is More Costly In Post-Pandemic Year, 2023

Regular readers of this column know that I’ve always felt buying a new car was generally preferable to leasing. The main reason is that leasing is more complex than buying. The cost of a lease is based on the “lease factor” (analogous to interest rate), “residual value” (estimated value of the vehicle when the lease is over), “capitalized cost” (analogous to the purchase price), the down payment (just like the down payment when you buy), the lease term (number of months), “purchase option price” (lessor’s right to buy the lease car at end of the lease term), and the most important and obvious to the lessor, the monthly lease payment.

 
All the items listed above are not quoted or advertised to potential customers but hidden in the fine print of the advertisement. All the prospective lease customer hears from the salesman or learn from the advertisements is the monthly payment. Most of us are “payment buyers” whether we buy or lease. We a have regular income that we earn each month and monthly expenses. Balancing the income against the expenses is called budgeting. We too often fall for the trap of buying because a monthly payment will fit into our monthly budget without analyzing the consequences of the TOTAL COST of a lease or purchase. This is why car dealers can lure us in with a low monthly payment, when, in fact, their making a very large profit. Historically, dealers’ average profits on leases are about twice the profits on purchases.

 
Post pandemic, leasing has become even more costly. If you leased a car in the past 2 ½ years, you can or have, exercised your option to purchase your off-lease car thousands below the market price. Today, this advantage has disappeared because used car residuals are much higher and there is no monetary gain for you when you exercise your purchase option. Pre pandemic dealers leased about 30% of their new cars; Post pandemic this percentage has dropped to about 9%. Furthermore, with the high demand and low supply of new vehicles, manufacturers and dealers are offering no special incentives to lease. Dealers can make as much or more profit on a sale vs. a lease simply because he can charge you thousands of dollars above MSRP, but leasing companies won’t allow this when he leases you a car. Remember that the dealer “sells” your lease car to the leasing company.

 
My advice to you is ignore all car dealer and car manufacturer advertising but be especially leery of lease advertisements. I can guarantee you that you will never find a lease payment advertised that doesn’t have very large down payment hidden in the fine print.

How to Buy or Lease a New Car Confidently

Buying a car can be an exciting experience, but it can also be stressful and overwhelming. With so many different models, features, and dealerships to choose from, it can be hard to know where to start. But by following a few simple tips, you can make the process easier and more successful.

First and foremost, do your research. The most reliable and accurate source for researching the quality, reliability, safety, and value of a car is Consumer Reports. They offer detailed information on every aspect of a car, and they are completely unbiased. Take advantage of their website to research different models and make an informed decision on which vehicle is best for you.

Once you have an idea of what kind of car you want, it's time to start shopping for the best price. The internet is a great resource for this. Shopping online allows you to compare prices from dozens of dealerships and get the lowest, honest price for your chosen vehicle. You can also communicate with dealerships by phone and text, which can be useful in negotiating the price. But be careful not to visit the dealership unless you are test driving the vehicle or picking it up and paying for it. By physically going to the dealership, you risk playing on the salesman's home turf and relinquishing your control.

It's also important to shop around. Don't settle for the first dealership you find. Shop around and get as many prices as possible. The more prices you get, the lower the price you will pay. Shopping online allows you to compare prices easily and quickly, so take advantage of this resource.

However, be wary of third-party auto buying sources. While some are reliable, others allow their dealers to add thousands of dollars in hidden fees to the prices they post. Costco, TrueCar, and Consumer Reports are three exceptions that are known for their honesty and transparency.

Finally, if you finance your purchase, arrange that directly with your bank or credit union, preferably your credit union. If the company you work for doesn't have a credit union, there are numerous credit unions you can join, independent of where you work. This will help you get the best interest rate and save you money in the long run.

In conclusion, buying a car can be a daunting task, but with these tips, you can make the process easier and more successful. Research your options, shop around, and be careful when dealing with dealerships. With a little patience and diligence, you can find the car of your dreams at a price you can afford.


This article was written by an AI, ChatGPT, based on an article I wrote last year. The illustration was also made by AI, OpentArt.AI, using the prompt "confident people flying cars out of a car dealership and car salesmen are shooting laser guns at them as they escape."