Understanding Increasing Auto Prices and Insurance Rates

If you’ve shopped for a vehicle recently, you have undoubtedly experienced sticker shock. That’s because the price for new cars and trucks rose by 11.4 percent between June 2021 and June 2022, while the used car and truck market saw a 7.1 percent increase. In a scenario not seen in decades in the auto industry, the True Market Value (TMV)––the amount buyers are willing to pay––is often exceeding the manufacturer’s suggested retail price (MSRP).

Why Have Vehicle Prices Risen So Dramatically?

At play is a classic example of economic supply and demand.

High Demand

With the end of the pandemic, people are returning to work, and new jobs are being added. People who have delayed purchasing due to previous job uncertainty are now looking to buy. Some former public transport commuters are now driving to limit COVID exposure. Commuting, vacation, and restaurant spending was way down or nonexistent during the pandemic, so those who kept their jobs have accumulated cash and are ready to buy. In addition, rising stock market values, government stimulus programs, low interest rates, and the home refinancing boom that lowered mortgages have given buyers even more purchasing power.

Low Supply and Supply Chain Disruptions

In addition to exorbitant prices, buyers are being met with limited options for purchase and extended delivery times.

Vital auto parts are in short supply, most notably the silicon chips/semiconductors that control onboard processors, operating everything from the engine to the seat adjustments. Some auto makers are reserving the available chips for the more expensive models, further limiting affordable options.

The shortage or unavailabity of certain parts is causing bottlenecks in production, and heavy delays and disruptions in the interwoven complexity of the supply chain.

Matt Winters, Vice President of Leasco Automotive in Teaneck, New Jersey, explains another cause being seen by those in the automotive industry.

“Due to the high cost of fuel, truckers are requiring full loads before moving inventory from the factory to the wholesalers and dealerships, causing further delays.”

Many European models utilize wiring harnesses assembled in Ukraine, and the Russian invasion has put a halt on production, with the limited number of vehicles assembled not being exported.

Labor Shortages

Labor shortages at all levels––from factory workers to mechanics to salespeople––is also adversely affecting production and supply. Additional worker dissatisfaction is increasing early retirement, resignation rates, and strikes among unionized workers.

Increase in Quality and Complexity of Vehicles

Compared to only 20 years ago, there really are no more “economy cars.” Even lower-end models provide luxury features, safer technology, and better gas mileage, and buyers are enticed by each new generation of options. A change in consumer preferences from sedans to SUVs and pickups has also added to overall cost increases. Both trends had been growing long before the pandemic, but their effects have only recently become apparent as part of the larger cycle of price increases. 

High Inflation 

Inflation is a general increase in the prices of goods and services in an economy, and right now it’s being felt when purchasing everything from groceries to vacation rentals to automobiles. Between June 2021 and June 2022, the Consumer Price Index (CPI) rose 9.1 percent. This means that, on average, we are spending 9.1 percent more than we were a year ago for the same goods and services. 

Used Cars, a Double-Edged Sword

Used car prices are rising even higher than new car prices, but because of new car shortages, dealers are purchasing used vehicles to satisfy demand. This scenario benefits sellers, who are getting top dollar for their used cars. Used cars have often become worth more than what they were purchased for, even after years of added mileage and wear and tear. And in some cases, used vehicles declared a total loss are bringing in values above their original purchase price.

Rental Prices Are Not Immune

To keep afloat during the pandemic, many rental agencies sold large parts of their fleet, causing current inventory shortages now that travel is rebounding. Automakers also don’t have excess inventory to sell to rental companies at a discount, so they have to pay more for what they can get, and this gets passed on to the consumer.

Tips to Navigate High Prices

• Be flexible in your preferences and options, you may get a better deal if you don’t require all the bells and whistles.

• Don’t wait if you need a car, get your order placed with the factory as backlogs are causing severe delivery delays

• Take advantage of your pre-owned vehicle value, which is most likely worth much more than it was a short time ago, increasing your trade-in or resale value.

• If you are leasing a car, consider extending your contract and buying the car outright when the lease is up.

• Consider using a lease broker who can offer more options than dealers, better customizing your search.

What’s in the Future

Car and Driver magazine predicts new vehicle prices may level off sometime in early 2024 when supply will get closer to demand, and we are already seeing wholesale prices falling.

Since leased cars are generally contracted for three years then sold as used, it’s predicted that the volume of used cars will be lower in 2023 and 2024, so the problems of higher prices and limited supply will last even longer for used vehicles.

Auto experts agree that the car-buying experience is permanently changed, and not in favor of the consumer. Buyers should expect new dealership models where online purchasing is prevalent, and traditional brick-and-mortar facilities will be scaled-down with little to no inventory. Prices will be non-negotiable, and there will be less or no discounts and incentives for the buyer.

Rising Insurance Rates

Along with the high cost of vehicles, consumers are also facing rising insurance rates. National rates are increasing by an average of 4.9 percent, according to approved rate filing data from S&P Global Market Intelligence.

Why Are Rates Increasing?

Insurance rates declined during the pandemic in 2020 because people were driving less and filing fewer claims, allowing many companies to issue refunds. With the end of the pandemic, and everyone back on the road, there are more accidents, claims, and repairs. So, while rates have increased, they have generally not risen past pre-pandemic levels, although this may not last.

Rising Costs = Rising Rates

Many of the same factors causing auto price increases are causing insurance rate increases. When claims are submitted, insurance companies are paying more for repairs, parts, labor, storage, and rentals, and these are being passed on to the insured.

Change in Preferences

Consumers are increasingly choosing larger models with more features, which are more expensive to insure due to higher repair and replacement costs.

Change in Driving Habits

With drivers back on the road post-pandemic, insurance companies have seen a sharp increase in theft and in aggressive and distracted driving, causing more serious accidents and deaths. 

The subsequent increase in claims is leading to higher rates across the board. In addition to the rising rates for auto repairs and replacement, companies are seeing price increases for legal fees, hospital stays, and other medical costs.

Less Companies Offering Reinsurance

Reinsurance is a policy for the insurance company, to help them guard against an onslaught of claims due to a storm or other catastrophe. Because of more severe and frequent weather events, many companies are limiting or cancelling reinsurance options for insurance carriers, especially in coastal and flood areas. This leaves insurance companies vulnerable, causing some consumers in affected areas to face renewal increases up to 60 percent.

Talk to Your Agent for Options

You may be tempted to lower your coverage to save money, but insurance agents advise against this strategy. Vehicle insurance is designed to protect you and your finances in the aftermath of accidents, and lowering your coverage could leave you vulnerable in many ways.

If you are concerned about a renewal increase or overall rising insurance costs, review your current policy with your agent. He or she can research pricing with different carriers and review your entire insurance portfolio for possible bundle discounts.

By Colleen Woods-Esposito