The Indicator from Planet Money - The Case Of The Soaring Car Prices

Since April, the price of used cars has surged. Some cars have even gained in value, which is highly unusual for an asset that usually depreciates. Turns out the usual suspects are behind this mystery: supply and demand.

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hey mon is Cardiff. This is indicator from Planet Money. And today I'm joined by a special guest Camila domonoske from the NPR business escamilla. How are you? And you have brought us this really great story about something that we on the indicator touched on a few months ago. It's about this kind of mystery in what's happening with used car prices. So there's this very basic rule the law of Economics when it comes to cars. They go down in value over time. They'd appreciate you drive a car off the lot. That's it. It immediately has lost a ton of value and it only gets worse as the car gets older this year. I mean 20 20. I feel like I say this all the time this year something weird happened. Yeah down is Up Up Is Down. I mean nobody knows what the heck's going on. So in this case, I talked to a guy named Aaron Springer.

On the Volkswagen Jetta SportWagen. It's a 2014. He bought it used a couple years ago so far. That's like nothing weird about that. But this summer he heard the car prices were getting hot looking for salad. I love this car. But let me go see what exactly they're playing and it was big carvanha. The used car site offered him $1,500 more than he paid for it in 2018. I mean, it's just too good of a price to not sell it. So what happened here and happened all over America is that used car prices in general went up so much and so quickly that they could cancel out the rate of depreciation in some cases by a lot what we are going to find out why this happened and we're going to solve the mystery you got to wait until after a quick break.

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Okay. So this really unusual movement and used car prices. It comes down to the usual principles of basic economics supply and demand when Supply goes down the price of that thing goes up. And when demand for it goes up. The price of that thing also goes up in this case. Both of those things are happening supplies going down demands going up Camilla. Let's start with Supply. So what happened there reason number one why the supply of cars went down is the world stopped making Vehicles? Jonathan smoke is an economist with Cox Automotive in early every Factory in the world that feeds vehicles to the US market were shut down between six and eight weeks Market quickly started to affect the used car market to what is the second reason Supply shortage reason to is

Super repossessions. This is normally a source of used vehicles entering the market but between the financial crisis in the pandemic, this is been a really devastating time to lose a vehicle. So some states put a moratorium on car repossessions. We're cooking here reason number three is a supply shortage in used cars season 3 is no one was renting cars. So normally companies like Hertz and Enterprise are constantly buying brand new cars and selling off cars that have been driven for a year or two this inject like 2 million cars per year into the used car market, but this spring the rental car industry just hit the pause button yours Ivan Drury. He's with the auto data company Edmonds was driving with their they had so we kind of had a drought in that near New use segments.

Hitting the market all at once because people Wanted cars and that's what you'd expect. Right, but the rental car companies were like no, we don't need to sell these we're just going to wait until people rent them again. Right one more reason for you. Okay play shortage reason number for is lease extensions. So if you had a leased vehicle and your contract was ending in March or April or May who wanted to deal with replacing it during a lockdown a lot of people just extended it for a few months and those cars didn't enter the market at the time. They normally would have either four reasons why there's been a supply shortage in used cars pushing their price up and we're only like halfway through all the reasons because that we got to cover the demand side demand for used cars going up. So give us the reasons for that again a whole bunch of factors here. But reason one why demand started to go up was the stimulus a lot of people when they get a chunk of cash put it toward a car you see it every year.

Tax returns and you definitely saw it with those care Zacks checks. Yeah, that makes sense stimulus checks stimulate. There's money there money to spend higher demand got it reason to why demand went up was the fear of getting sick particularly for people who used to rely on buses are subways Simone Baptiste has with Vehicles for Change which takes in donated cars and helps low-income workers buy them during this pandemic with the social distancing to get on the public transportation when you're with other people, it does help to have your own vehicle. Unfortunately, a lot of the people most worried about this low-paid workers who can't telecommute they often have the hardest time affording a vehicle and that was even before prices went up Baptiste says her group has gotten more requests for help during the pandemic but in the same category, you also have some affluent City dwellers who have been Carlos by choice. They might have an easier time going out and getting a vehicle.

Paid workers you've got people who did not own a car before the pandemic and now they want to change that now they do want to own a car, right and then there's reason number three demand went up which is people who did on a car before but now want a different kind because the pandemic change their lifestyle. Maybe they work from home now where they moved Jonathan smoke The Economist with Cox Automotive. He says maybe you liked a smaller car for your commute. But now what you're doing is taking the family on road trips or doing more projects at home and going back and forth to Home Depot then that larger SUV and pickup truck may be more attractive man. Well, yeah people who still have jobs might actually have extra money to spend because they aren't spending it on restaurants or sport games or airplane tickets plus interest rates are low, especially

Have good credit. Okay, so tired all together for us supply of cars went down very early on in the pandemic and then demand for cars started to get really high even for an economic crisis and everyone is competing for that small pool of car is pushes prices up and up and up and then we have a cracked the case of the soaring used car prices the conspiracy culprits cooperating as many as like The Hound of the Baskervilles but still you can sort of tell us what this means for different groups of people. I imagine there are some people who are going to benefit from this trend and some people who are going to be hurt by it is anyone who's trying to buy a used car right now, especially anyone on a budget who is looking for a bargain. It's just really really hard to find an affordable car out there right now. All right, and who's winning from?

Ran from higher used cars. Well, anyone who sells used cars including ordinary people with a car in their driveway that they might be willing to part with car dealers obviously rental car companies. It's also actually really good news for car manufacturers. That's a huge relief for the industry because normally during a recession car prices go down and stay low for a while. But here we are in an economic catastrophe and used car prices went soaring have I mentioned that 2020 was a weird year down. Nobody knows what the hell's going on, but I do know Camila domonoske that we really appreciate you bringing us the story. Thanks so much. Thank you so much for having me. It was fact-checked by Sean saldania and edited by Patty Hearst indicator is a production of NPR.

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