Name: Why Car Ownership Is Getting So Expensive | CNBC Marathon
Uploaded: 2024-07-11T05:04:21.000Z
Duration: 44 min 14 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

A car is one of the biggest purchases a person will make in their lifetime.

But unlike a house, a car starts losing value right away.

More than 100 million Americans have an auto loan.

And auto loan debt in the U.S. is currently at $1.5 trillion, a record high.

If cars are to be affordable, they must also be affordable to maintain and they must be affordable to repair.

But unlike a house, a car starts losing value right away, literally as you drive it off the lot.

You could keep it spotless inside and out, give it regular maintenance and protect it against every ding, dent and scratch.

Depreciation, the rate at which that happens, is one of those numbers everyone in the automotive world thinks about.

Consumers, automakers and the massive used car market, which makes up somewhere around 40 million sales each year, more than double the sales of new cars.

But in 2020, something strange started happening, turning the car market upside down.

Used vehicles were actually increasing for about two years, which we've never seen anything like that for the market.

A lot of those trends have abated since, but those odd times led to lasting changes.

In the post-pandemic world, there are fewer cars to go around and prices for both new and used vehicles are still high.

Car buyers want their cars to hold value because it will help them get their money back if they decide to sell it at some point, whether they're trading it for a new one or not.

In addition, a lot of car purchases are financed, which means if the resale value of the car dips too low, a buyer could end up paying more for the car than it is worth.

That is what it means to be underwater on a loan.

Similarly, automakers want their cars to hold as much value as possible, in part because they know customers care about that.

Depreciation also affects how automakers charge for leases, which are an effective way of drawing in new customers but are expensive to run for automakers.

Sedans lose value faster than SUVs and cars from brands with strong reputations for quality and reliability depreciate more slowly.

But on average, cars lose about 10 percent of their value as soon as you drive them off the lot.

We just like being in a brand new car and it's not brand new once you take it off the lot.

The 10 percent loss in value corresponds almost exactly with another specific number.

And that number, say some insiders, is the primary reason a vehicle's value drops that much in the first day of ownership.

Most new cars are sold with incentives at one point or another when first purchased by a consumer.

An incentive is a discount on a vehicle provided by a manufacturer or dealer to induce people to buy it.

The average incentive on a vehicle was about 10 percent.

That means on average, new vehicles were sold for about 90 percent of their MSRP or manufacturer suggested retail price.

And so that car you bought seems to drop by 10 percent in value the moment you drive it off the lot.

What is actually happening is that the market is pricing in the probability you received a 10 percent discount or incentive on that vehicle, even if you didn't.

It's kind of a messy part of how we do things because we can't go back and see what the average transaction price is.

But we know historically what MSRP is on a year make model combination.

And so we can go see the value of that car against its original MSRP.

When you sell your car, chances are you are often selling or trading it back in at a dealership.

The dealer is going to offer you the wholesale price on the vehicle, what the vehicle would fetch at a wholesale market like a dealer auction.

Those prices are always lower than the retail price, what the dealer would sell it to another consumer for, as there are additional costs and margin that need to be absorbed.

That lower wholesale value also makes up part of the depreciation consumers see and feel.

Higher priced cars have higher markups or variance.

So there is an even bigger gap between their retail price and wholesale value.

But there is a third reason why cars lose value so quickly.

An economist named George Akerlof won a Nobel Prize for coming up with this idea.

Akerlof's famous paper is called The Market for Lemons.

In any market, there are information asymmetries.

This means sellers know more about the product they are selling than potential buyers do.

If you have a car and it's like three days old or three months old and you sell it, why would you do that?

If the car was a good car, you're probably doing it because the car is a lemon.

From that first day drop, a car's value slides further about another 10 percent throughout the first year.

In the second and third year, it drops again and again.

Estimates of how much can vary depending on who you talk to and what they are measuring.

Again, a car will fetch less money on a wholesale market than it will on a retail market and maybe during a transaction between a private buyer and seller.

In normal times, a steady supply of new vehicles year after year is enough to drive the value of any given car down.

Add to that the normal wear and tear that comes with ownership.

You may get dings in your door over time.

You know, maybe there's a crack in your windshield.

Maybe your kid spills juice in the backseat and the, you know, the upholstery is messed up.

And all that's just wear and tear on a car, which means that it's not worth what it originally was or to put it back in that state, someone would have to invest money to recondition the car back.

After about three years, vehicles on average historically held about 50 percent of their value.

Three years is a kind of benchmark for the used car market because that is the typical term for a lease and leased vehicles are a large source of vehicles for the used market.

There are exceptions to this, of course, exotic cars, collector cars, limited editions, any car that is highly valuable won't depreciate normally and can even appreciate.

It is rare for a car to appreciate or increase in value, but those are some that do.

You know, if you if you lucky enough to buy it a new, you might actually sell it for profit.

I think Tesla just had a in their agreement and they just pull it back again.

So you cannot resell their Cybertruck for a year.

At one point, Tesla even threatened to sue resellers for $50,000.

It reportedly removed the clause from its user agreement in mid-November 2023, just days before the truck's release, and then reinstated it when Cybertrucks started popping up for sale on the Internet.

This was also true of exotics like the Ford GT.

Ford sued wrestler and actor John Cena for reselling his Ford GT less than a year after purchasing.

During the COVID-19 pandemic, as people stayed away from public transportation and flying, used car values skyrocketed by somewhere around 30 percent.

And by the end of that year, it was $13,000.

So people were buying cars, driving them for a year and then selling them for profit.

It's still it's still your economy one on one, strong demand, short supply, prices went up.

It was just to the extreme that we've never seen before.

On top of it all, production shutdowns and supply chain and chip shortages limited the number of cars in the marketplace.

Automakers weren't leasing or selling cars into fleets such as rental agencies.

The few cars they were selling were higher priced vehicles that helped maximize profits.

New vehicle supply didn't meet demand, though, which drove customers into the used market.

Even rental companies, which had sold off a lot of their fleets at the beginning of the pandemic, were buying used cars at auction to satisfy their own customers.

We had two very distinct periods of vehicle appreciation, which is unheard of.

You know, we we had prices that moved up into the spring, early, early summer in 2021.

And then they kind of went sideways and then we got to August, September and they had prices and values that were much, much higher than what anyone was used to.

Fewer new cars in 2020 means fewer used cars in 2023 and 2024.

That pandemic price bump has evened out a bit, but cars are holding on to about 60 percent of their value after three years, a 10 percent increase from pre-pandemic times.

We expect some normal, normal seasonality, more normal depreciation, but the baseline for prices is going to be elevated.

A lot of the goods and materials that go into producing a car are still sitting at high levels.

Even though inflation is coming down, we're not in a period of deflation.

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Why Car Ownership Is Getting So Expensive | CNBC Marathon

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