Why Car Ownership Is Getting So Expensive | CNBC Marathon

Summary

The video script discusses the financial implications of car ownership, highlighting the depreciation of vehicles and the record-high auto loan debt in the U.S. It delves into factors affecting car value, the impact of incentives and wholesale pricing, and the challenges of maintaining and repairing modern vehicles, especially EVs. The script also addresses the rising costs of car ownership, including repair expenses and the shortage of skilled technicians, and touches on the potential for more affordable options in the future.

Takeaways

• 🚗 Cars are one of the largest purchases individuals make, often losing value immediately after purchase, unlike real estate which can appreciate over time.
• 📉 The rate of car depreciation is significant, with vehicles typically losing about 10% of their value the moment they are driven off the dealership lot.
• 💰 The current auto loan debt in the U.S. is at a record high of $1.5 trillion, reflecting the substantial financial commitment required for car ownership.
• 🔑 Cars need to be affordable not only at the point of purchase but also in terms of maintenance and repair costs to remain accessible to consumers.
• 🛠️ The cost of car repair has been rising, partly due to the complexity of modern vehicles, the shortage of skilled technicians, and supply chain issues.
• 🛍️ Incentives play a significant role in car pricing, with the average new car being sold at about 90% of the MSRP, affecting perceived value and depreciation.
• 📈 The used car market, with around 40 million sales annually, is larger than the new car market and has seen unusual appreciation in recent years due to market disruptions.
• 🏠 The concept of 'underwater' on a loan, where the car's value is less than the outstanding loan amount, is a concern for buyers when resale values dip.
• 🚘 Different car types depreciate at different rates, with luxury cars losing value fastest and brands known for quality and reliability depreciating more slowly.
• 🌐 The market for used cars is influenced by factors such as new car supply, leasing practices, and economic conditions, including inflation and interest rates.
• 🔋 While electric vehicles (EVs) have been reported to have high repair costs, this is partly attributed to their status as relatively new technology with less mature supply chains and service networks.

Q & A

Why do cars start losing value as soon as they are driven off the lot?

Cars begin to lose value immediately due to depreciation, which is influenced by factors such as consumer preference for new cars and the market's expectation of incentives that were likely offered at the time of purchase.

What was unusual about the car market trend in 2020?

In 2020, used vehicles experienced an increase in value for about two years, which was an unprecedented trend in the car market, typically known for depreciation.

Why are there fewer cars available in the market post-pandemic?

Fewer cars are available due to production shutdowns, supply chain issues, and chip shortages, which have limited the number of new cars reaching the marketplace.

How does car depreciation impact the auto loan industry?

Depreciation affects the auto loan industry as it can lead to situations where buyers may end up paying more for a car through financing than what it is worth if the car's resale value dips too low.

What is the average percentage of value a car loses as soon as it is driven off the lot?

On average, cars lose about 10% of their value the moment they are driven off the lot, which corresponds to the average incentive provided on new vehicles.

Why do luxury cars depreciate faster than other types of cars?

Luxury cars tend to depreciate faster due to their higher initial cost and the fact that they are often seen as less practical or desirable in the used car market compared to other types of vehicles like SUVs.

What is the impact of the 'Market for Lemons' theory on car depreciation?

The 'Market for Lemons' theory suggests that when a car is sold shortly after purchase, potential buyers may suspect it is of lower quality, which can lead to a rapid decrease in the car's value.

How has the pandemic affected the value retention of cars?

The pandemic has led to a decrease in new car production, which in turn has increased the value retention of used cars, with cars holding on to about 60% of their value after three years, a 10% increase from pre-pandemic times.

Why are car repair costs rising?

Car repair costs are rising due to factors such as the increased complexity of vehicles, a shortage of skilled technicians, and supply shortages exacerbated by the pandemic.

How do electric vehicles (EVs) compare to internal combustion engine (ICE) vehicles in terms of repair costs?

EVs are generally more expensive to repair due to their unique technology and components, such as high-voltage batteries, but the total cost of ownership may decrease as the technology matures and becomes more widespread.

What is the current state of the auto loan debt in the U.S.?

Auto loan debt in the U.S. is currently at a record high of $1.5 trillion, with more than 100 million Americans having an auto loan.

How do automakers benefit from cars holding their value?

Automakers benefit from cars holding their value as it attracts customers who are concerned about resale value and influences how automakers charge for leases, which are an effective way of drawing in new customers.