Why Car Market Crash Is Happening In 2024?

Car market crash 2024

According to the internet, the car market crash 2024 Is Happening. You have used car prices plummeting, and then you have new car prices about to crumble. But if you walk into a car dealership today, what you’ll see is that car prices are still pretty expensive. This creates a lot of confusion for people like me who are in the market for a new car in 2024.

My 2007 Toyota Solara, with almost 200,000 miles on it, has seen its best days, and it also is missing a bumper. Being the weirdo that I am, I decided to do some digging to learn if the car market is going to collapse in 2024 or to see if car prices are going to boom even more this year, which I explained in this blog post.

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Why Car Market Crash 2024 Is Happening?

Now to really understand where car prices are going in 2024, you have to understand how our car market got to where we are today in 2024.

To understand that, you have to take a look at the car market between 2019 and 2024 to understand the different things that changed in our economy, which impacted car prices and the car market because we saw a lot of shakeups in the economy.

Now back to the car market in 2019. The average new car sold in America for just over $334,000, and the average used car in America sold for just over $20,000. These numbers are according to Kelly Blue Book.

If we compare the car prices in 2019 to the car prices in 2023 (because we don’t really have much data in 2024 yet – it’s still January 2024, at the time of writing this blog post), you’ll notice how much car prices have changed in just a few years.

In 2023, the average new car was selling for just over $48,000, and the average used car was selling for just over $26,500. In 2023, that means over the course of just a few years, new car prices jumped by around 41%, and used car prices jumped by around 32%.

While over that same time between 2019 and 2023, wages grew by less than 15%. This is wages – people’s incomes grew significantly slower than the prices of cars, which naturally can have you wondering: well, if people are spending so much more money for cars while incomes are not keeping up, is that going to cause a problem? Well, hold on to that question for a second.

Now, personally, I am absolutely not an advocate for you to go out and finance a car. But I think it also helps to understand how car payments have changed over these years. Unfortunately, most of America is financing their car.

Back in 2019, if you wanted to go out and finance this new car, you were paying around $554 a month. This was the average car payment in America in 2019 Vs in 2023, the average new car payment jumped up to right around $726 a month for that same car.

That means over the course of these few years, your car payment also jumped by around 31%, while wages grew by less than half of that.

In a normal economic environment, what you’d like to see is that car prices would be going kind of relative to wages. Sometimes you see a little bit of discrepancy, but generally, you’d like to see car prices growing along with wages. That means people are spending the same amount of income relative to that car price.

But that’s not what we saw over the last few years. We saw car prices shoot up much faster than wages, which is why even though we saw car prices fall in 2023, people still feel like cars are extremely expensive.

To understand that, you have to understand what happened in 2020. Let’s understand what happened between these years.

Supply And Demand

The number one main reason why we saw this huge skyrocketing of car prices between 2020 and 2022 was because we saw an imbalance between supply and demand between 2020 and 2022.

Let me start by talking about the supply imbalance that we saw between 2020 and 2022. Not only did we have a chip shortage, but we also had a labor shortage, making it very difficult for car companies to produce more supply, more inventory, and more cars that they could sell.

It feels almost like a different world now, but in 2020, when the pandemic hit, manufacturing across the world was shut down, and our global supply chain was impacted heavily. Which meant that car companies who need these computer chips to build their cars could not get a hold of these computer chips, which meant car companies could not produce more cars.

So car companies couldn’t get the products to produce more cars, which led to a lower inventory of cars being created. And then second, when car companies did have the products to build cars, they couldn’t find the labor to actually build cars.

Because if you remember when 2020 and 2021 were going on, the government was giving out free money to people. There were big unemployment checks, and people just didn’t want to go to work.

Some people were scared to go back to work because of the pandemic. So it was very hard for companies to go out and find labor.

So No.1, companies couldn’t get the parts. And then even if they got the parts, they couldn’t get people to actually put the parts together to build the cars.

Because even if you’re not talking about the United States, you had factories across the world that were shut down for way longer than the United States. So car companies were struggling to produce their products.

So first, they couldn’t get products to build cars. They couldn’t get people to build the cars, which meant they couldn’t create these cars to sell, which then meant they have a limited amount of cars on the lot. While at the same time, everybody wanted to buy a new car.

The car price boom started in 2020, but it really accelerated in 2021. And the reason for that was in 2020, in the early part of 2021, people had very little expenses because you didn’t have to pay your mortgage.

People weren’t paying their rents. You didn’t have to pay your student loans. And people were not going out to eat because everything was shut down. And on top of that, people were making more money through unemployment checks, through stimulus checks, through whatever types of money they might be getting.

Businesses were getting money from the government as well. So people were making more money. They had lower costs.

So people had more money. Then on top of that, you had this increased interest to go out and buy a new car because of what people like to call this pent-up demand.

Everybody had this pent-up demand because of the pandemic. Not to mention the fact that Instagram really glorified everybody wanted to buy a G Wagon and all those luxury cars in 2020 and 2021.

And then you also had some of the lowest interest rates ever, which meant that if you wanted to go out and buy a car, well, if you could find a car, you could get financing at some of the lowest rates ever. This created some of the biggest amounts of demand for car buying ever. While there were some of the lowest amounts of cars available for sale ever.

Now, I didn’t do good in economics class. I almost failed my economics class in college.

But what you learn in economics class is when you have a low amount of supply and a high amount of demand, that generally causes the price of things to go up. And that’s what we saw happen in the car market. You had everybody that wanted to buy a car.

Nobody had cars available for sale. Which meant that if you had a car available for sale, you could then sell it to anybody for a big profit. In fact, I talk very openly about how cars are liabilities.

How you’re going to lose money with your car. Well, for a brief period between that 2021 and 2022 time, even a little bit into 2020, people were selling their cars at huge profits.

You could buy a car, drive it around, just tax the car, and then sell it for a $5 to $10,000 profit after 12 to 18 months of driving it around. It was a very strange economy. And the reason was you had such low supply with so much demand that people wanted to buy cars, especially nice cars because people had money. They had the interest. And then you had these low-interest rates.

So people were wanting to go out and buy these nice cars, which then caused car prices to boom starting in 2020, especially in 2021, and then into 2022.

But then things started to change in 2023. See, in 2022, that was when the Federal Reserve banks started raising interest rates. But there was still a lot of other demand.

People still had cash ready to pay for cars, even if interest rates started rising. But the Federal Reserve Bank continued raising interest rates through 2022 into 2023. And 2023 was when we started to see demand start to cool down, and we started to see supply start to pick back up.

Why did supply start to pick back up? Because we started to see the supply chains ease. We started to see systems ease.

We started to see the manufacturing plants open back up like normal. Which means now car companies are able to build more cars, kind of like normal again. And then at the same time, demand started to fall.

Now, there was still high demand, but it started to fall relative to the crazy demands that we saw in 2021.

Because then people started to realize,

“Oh, I can’t blow my entire $401K on a car.”

People Realised

“Yeah, I might like a G Wagon, but maybe I should start investing for retirement. Or maybe I should care about my credit card debt instead of a G Wagon.”

And then interest rates were a whole lot higher in 2023, because the Federal Reserve Bank raised interest rates 11 times between 2022 and 2023. This lower demand and now this higher supply then caused car prices to finally start falling in 2023. And it wasn’t just new cars; used car prices fell by around 20% between the 2021 peak and 2023.

So mathematically today, if we ignore interest rates, assuming you’re not going to finance a car, the dollar amount that you have to pay for a car today, assuming you’re going to negotiate the price, can be less today than what it was 12 months ago or 18 months ago. Which is good news if you want to go out to buy a car, because that means you can get a cheaper car today than a year ago. But the reason why car prices still seem so much more expensive is because, well,

  1. number one, if you’re financing your car, you’re paying higher interest rates today than you were in 2022.
  2. number 2, the reason why it feels so expensive is because car prices have grown so much between 2019 and now.

 

So even if car prices fall by 10%, they still seem expensive if you’re comparing car prices to what you thought they were before the pandemic.

What we do know for a fact is that car dealerships are starting to feel the impacts of higher interest rates. And if interest rates stay higher for longer, that’s going to put more pressure on car dealerships and car companies to lower the prices of their cars.

How do we know? Well, you can just take a look at what’s happened with some of the startup companies, especially in the car resale market.

We all might remember what happened with Carvana back in 2023, where Carvana was on the verge of bankruptcy because, well, they just weren’t selling as many cars as they thought they would have.

And if you look even more recently, there was a very hot car resale startup called Vroom, which had a very hot IPO in 2020, which then in January 2024 decided that they’re going to shut down their used car selling division and they’re going to lay off pretty much everyone of their employees because they don’t have the same demand of

People buying these cars and dealing with higher interest rates find it very hard to make any money. Not to mention the fact that we’ve been seeing used car prices for G Wagons and other luxury cars begin to fall.

Actually, they’ve been falling for a little while now, partially due to the fact that people were way overpaying for these cars, like G Wagons back in 2020 and 2021.

People were paying $10 to $20,000 over MSRP standard, and now they’re letting go of these cars for a huge discount because many people are selling these G Wagons at the same time.

For those of you in the car market, what does all this mean?

Number one, I don’t really care what’s going on with interest rates when it comes to loans for cars because I have no interest in financing a car, and I don’t recommend anybody finance a car.

When you’re financing a car, you’re paying interest on a car that’s losing value, which means it’s like a double whammy: the car is losing value, and then you’re paying interest on the car that’s losing value.

However, interest rates are something that you have to pay attention to because they impact the demand side of cars. We know that supply has come up in 2023 because the chip shortage has been fixed, and the labor shortage is much better, so car companies are producing cars much better today than two years ago. It’s not perfect, but it’s much better today than it was. We know that the supply of cars has come closer to normal.

Demand is going to be impacted by three things.

Number one, when it comes to money, we know that money has become tighter for many Americans across the board because inflation has made things more expensive, rent is more expensive, groceries are more expensive, and incomes have not kept up. This has cooled down demand.

Second, when it comes to interest, if you go onto any used car site and look at G Wagons for sale, you’ll see that many people are trying to get rid of these expensive G Wagons, so interest has also cooled down.

૩. But the third thing that you really want to pay attention to, which is going to drive the demand side of car purchases, are interest rates.

If interest rates stay higher for longer, that is going to cool down demand and continue to put pressure on dealerships to lower the prices of their cars.

Why? Because this is what’s keeping a lot of people from buying the cars.

Now, again, I am not an advocate for going out and financing a car, but the average American wants to finance their car. I don’t agree with that, but that is the fact of car shopping.

If people need lower interest rates to finance cars and the Federal Reserve Bank keeps interest rates higher for longer, well, that is going to impact people’s abilities to buy cars. Because if demand is lower, then that doesn’t really create that big push to push car prices higher.

But if you start to see interest rates go lower because the Federal Reserve Bank starts cutting interest rates to stimulate the economy, which they said they want to do in 2024, well, then that could create more boost for people to want to go out and buy cars.

And if you start to see demand rise, well, then that could stabilize the car market and cause car prices to rise in 2024 faster than expected. Remember, car prices fell in 2023. In 2024, we don’t really know what’s going to happen, but the big thing you want to pay attention to is here with interest rates.

The Federal Reserve Bank says they want to cut interest rates. When will they do it? I don’t know, but if they start cutting interest rates faster than expected, expect that to create a boost for the car market. If the Federal Reserve Bank keeps interest rates higher than expected for longer, expect that to hurt car prices.

But at the end of the day, the big thing you want to understand is that if you’re going to go out and buy a car, whether it’s new or used, you want to make sure that you can afford it comfortably and not have to worry about the cost of the car.

That means buying a car that you can afford with cash comfortably. That way, whatever happens to the car market after you buy it doesn’t matter, because for me, I understand that my car is a liability. It’s not putting money in my pocket, although 2020 and 2021 were an exception.

My car is not putting money in my pocket, so I understand that when I put my money into my car, that is dead money. Which is okay. I like nice cars, but you’ve got to make sure that your car is not going to be eating into your ability to become wealthy. So make sure you can buy what you can afford with cash.

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