Lesson in supply and demand can start on car lot
Who’s ever heard of trading in a two-year-old vehicle and being offered $8,000 more for it than when you bought it?
That’s exactly what happened recently to someone I know when he traded in his Toyota pickup truck for a new one. The dealer offered him a trade-in value of $38,000 on the old truck; two years ago he bought it for $30,000.
He was stunned and elated. A used truck or car appreciating in value? It just doesn’t happen every day.
Well, that’s all changed, thanks mostly to the chip shortage.
What’s going on in auto showrooms is a perfect illustration of one of my favorite topics: supply and demand.
If you have teenagers, especially car-crazed teens who are hounding you for a set of wheels this summer, this is an economic lesson worth sharing with them.
You don’t have to be an economics major to explain this chaos to your 16-year-old. Just driving by a car dealership might spark some questions about why the lots look so empty.
A lack of computer chips that power many cars’ technology packages is driving the shortage of new cars and pushing the demand and prices for used cars to levels not seen in years. Pent-up demand from the pandemic is also pulling more buyers into the new and used markets.
It’s not just the auto market that’s been hurt by the chip shortage. Your kids probably know what’s happening with the PlayStation 5 gaming console: hard to get and very expensive (meaning low supply and high demand), and likely to remain that way into 2022, Sony’s CFO Hiroki Totoki reportedly told analysts.
The auto industry was reporting an average of 43% fewer new cars available in June compared with the same time a year ago. For some models, the lack of new products in dealership lots is even higher.
Shoppers who can’t find a new vehicle are turning to used and, as a result, those cars and trucks are in short supply and pricey.
Car Gurus reported the average price of a used car listed on its research site has increased more than 33% over the past year to $27,306. But in the market for used pickup trucks, the average price climbed almost 46% from 2020 to $37,736, Car Gurus reported.
That explains why my friend benefited from the supply-demand imbalance. It was a great time to sell because the dealer really needed the truck.
Don’t expect this supply-demand picture to remain this way too much longer. Once the unfinished cars and trucks get loaded with chips, dealerships will be packed again with rows of new products and prices should dip — at least in economic theory.
If you are kicking the tires with your teen, it might be best to wait until prices settle down for both new and used vehicles.
But, taking it one step further, if you are planning on trading in a vehicle for a used car for your son or daughter, supply and demand may be working in your favor. It’s all part of the economic cycle.