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Used Car Talk

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Jacob Roy (ph) is a college student studying aerospace engineering. And last week, he realized he had a problem.

JACOB ROY: I need to have a car by Saturday, otherwise I don't know how this is going to work out.

ROMER: Jacob is from Pearland, Texas, in the suburbs around Houston. But this summer, he's going to live in Dallas for an internship with a gas turbine manufacturer. And he knows he's going to need a car to get to and from his job each day. So he hits up his local used car dealer.

ROY: So I go up to the guy. I'm like, hey, I have $4,500, right? What? Maybe this wasn't the best car negotiating tactic, right? I was like, what car can I buy? And the dude laughed and said it'd make a great down payment. So it was pretty demoralizing.


Jacob spends three days just driving around the Houston area in his parents' car, visiting any used car lot he can find.

ROY: There's a lot of times I would just be driving along the road, would stop, say hey, name my price, and they would say, yeah, you should just go somewhere else.

ROMER: Before long, he's meeting people with cars on Craigslist at abandoned gas stations. He's test-driving cars that can barely get up to highway speeds. And the clock is ticking. He's going to leave for Dallas in a matter of days.

ARONCZYK: It gets to the point where Jacob starts to figure out what his backup plans are. Like, maybe I just don't buy a car. Maybe I just take the Greyhound to Dallas.


ROY: I figured, OK, 'cause I've done this before in high school, right? If I had a job, I could take my bike there, right? And this place is like 20 minutes away by bike. And I would just bring a bag of clothes. So I can bike there, get in there, change and then go to work.

ROMER: But this is, like, kind of your first grown-up job, right?

ROY: My first in-person office job - yes, sir.

ROMER: Like, so you don't especially want to roll up on a bicycle on your first day.

ROY: No, not at all.


ROMER: Hello, and welcome to PLANET MONEY. I'm Keith Romer.

ARONCZYK: And I'm Amanda Aronczyk. Like it or not, the United States is kind of built around cars, especially in places like Texas. And buying a car is always a giant hassle, but 21-year-old Jacob Roy had the misfortune of trying to buy his first-ever car at possibly the worst moment in history to buy a used car. All over the country, used cars are in really short supply, and they are really expensive.

ROMER: And as you may have noticed, this is actually true for a lot of things - lumber and mattress foam and refrigerators and houses and microchips, which we will get to that. But today on the show, we're going to focus in specifically on what is going on with used cars because the weirdness in that market contains all these lessons about how our economy reacted to the pandemic and how things are going to work as we start to head towards a post-COVID world.

ARONCZYK: Also, we'll see if Jacob ever gets his used car.


ROMER: So the simple version of the used car market goes like this. Every year, around 17 million new cars are purchased or leased in the United States. And over time, as their leases end or their original owners decide they are ready to unload those cars, those cars enter the used car market. New cars come in one end of the machine, used cars come out the other.

ARONCZYK: But inside that market for used cars machine, there are all these little mechanisms that determine how many used cars come out the other side and which used cars come out the other side.

ROMER: And so to try to get a better handle on why 21-year-old Jacob and our co-workers and your cousin and your neighbor and America is having such a hard time finding an affordable used car, we are going to pop the hood...

ARONCZYK: Pop the hood.

ROMER: ...On the machine - yeah, pop the hood - and poke around a little.

ARONCZYK: The first mechanism we're going to look at in the machine - used car dealers.

ROMER: Now, you may have a particular idea of a used car dealer in your head - plaid suit, maybe a cowboy hat, some dude making all kinds of promises about how this Hyundai Elantra, Amanda, is going to change your life.

ARONCZYK: Such a great car.

ROMER: Nicholas Soukas (ph) - he is not that kind of used car dealer.

NICHOLAS SOUKAS: Listen; it's just a piece of metal. It's nothing special. We're moving metal around here, nothing special.

ROMER: I met Nick (ph) at a used car auction in Doylestown, Pa., where he was trying to get his hands on some more metal he could move.

SOUKAS: I noticed another blue Toyota down there which was quite nice from the outside. But it's not what's on the outside. It's what's on the inside that counts.

ARONCZYK: Oh, Nick. So sweet.

ROMER: Nick is 32 - no plaid suit. He is wearing high-top Nikes and camouflage pants and a pink T-shirt from Levi's. There are about 50 pretty beat-up cars scattered around the lot at the auction, each with a big orange number scrawled on its windshield. Nick gets behind the wheel of an '05 Camry to give the engine a quick test.

SOUKAS: So right off the bat, we have a check engine light. It has 184,000 miles. And definitely, it needs a flex pipe. You can hear the flex pipe from the exhaust.


SOUKAS: You know, looks like we're going to have to skip this one.

ARONCZYK: Nick comes to four or five auctions a week. A lot of his job actually is not selling cars. It's buying the cars that he's ultimately going to sell. And Nick says that part of the job has gotten really hard lately.

SOUKAS: You know, I can't get inventory. I can't secure inventory. All I can do is stay firm on my prices and try to make as much money as I can on my cars. That's really it, you know?

ARONCZYK: In a normal year, he would try to keep 150, 160 cars on his lot. But now he is down to 80 or 90. Nick's running into a version of the same problem that the college kid, Jacob, was having. Used cars, even at auction, are really expensive right now.

SOUKAS: I've been looking at the prices on my cars that I sold in 2017 and 2018, and I can't even get those cars at the auction for the price I sold them back then, which is ridiculous.

ROMER: So the retail price in 2017 is lower than the wholesale price now.

SOUKAS: Correct, yeah. It's insane - absolutely insane.

ARONCZYK: But whatever the price, the process to buy is the same. This is what's called a sealed-bid auction. If a dealer likes a car, he writes down the bid and he puts it in a lockbox. Whoever bids the highest gets to buy the car.

SOUKAS: We all want that one car because it's phenomenal - low mileage, clean. Diamonds - you know, that's what we're looking for, diamonds.

ROMER: But this auction - not a lot of diamonds. As we walk around the lot, Nick is like one of those forensic investigators on TV, like, taking the black light to a crime scene.

People lie, Amanda. Evidence never lies.

ARONCZYK: Nick has got to figure out what exactly is wrong with each car...

SOUKAS: Let me just give it a little gas.

ARONCZYK: ...And whether that thing is so wrong that none of his customers will want to buy it.

SOUKAS: I always check the rearview mirrors to see if I see a cloud of smoke.

ROMER: Sometimes, like with a blue Jetta he looked at, the clue is under the hood.

SOUKAS: Looks like a squirrel nest - little squirrel nest.

ROMER: The nest was empty. Also, Nick says, it might have been a rat's nest.

SOUKAS: One time I found five or six kittens inside a hood. I rescued all of them.

ROMER: Sometimes, like with a blue Mustang, Nick doesn't even have to look that closely.

SOUKAS: Water damage front right - you can see the mold growing from there. This is definitely not for me.

ROMER: Finally, Nick sees a car in the lot that is at least worth taking for a test drive.

SOUKAS: This one looks nice on the outside 'cause it's a Ford Explorer. I think it's an '08, '09. It's got a good copper color to it, which is quite uncommon on these vehicles. Does have some minor wear and tear, scratches, but it overall looks pretty decent.

ROMER: Nick knows that all of the cars for sale here are trade-ins from a nearby new car dealership, which also has a used car lot attached to it. These cars here at the auction - they are the discards, cars that the dealer either couldn't sell or didn't even want to try selling.

SOUKAS: We don't know what the problem is, but we'll find out now - drives good, doesn't sound terrible.

ROMER: If you buy it, is that how you'll advertise it - drives good, doesn't sound terrible?

SOUKAS: (Laughter) We would sell it as is. No, we would fix it and take care of that problem.

ARONCZYK: The Explorer is not perfect. It's a 12-year-old car with 177,000 miles on it. But it doesn't have to be perfect. Nick just needs something to sell on his lot.

ROMER: By the time we get back to the auction, Nick has decided that the Explorer is at least worth bidding on.

SOUKAS: You know, I'm thinking - throwing a number out there - maybe 3,700, 3,800. I don't want to say too loud as these dealers are walking by, but maybe 4,000. I think 4,000 is a good number. I mean, it doesn't look like a bad car.

ROMER: Nick changes his mind a couple times, brings his bid back down to 3,850.

SOUKAS: I want you to give me the lucky number. And if I get it, I'll tell you I get it. I want you to give me the lucky number.

ROMER: I think we go 3,863.

SOUKAS: Thirty-eight sixty-three, OK. We'll see. If I get it, I'll give you a ring tomorrow.

ROMER: (Laughter).

SOUKAS: I'll thank you for this one.

ROMER: In the end, Nick ends up bidding on just two cars, the Ford Explorer for my lucky number, 3,863, and the Jetta with the squirrel/rat's nest under the hood for $2,555.

ARONCZYK: Nick drops off his two bids into the lockbox. He has to wait until tomorrow to see if he wins either of his bids.

ROMER: Now, any individual used car dealer is just a small piece of the used car market machine we were talking about before. Nick, for example, says he sells 500 or 600 cars a year.

ARONCZYK: So to figure out what's really going on, we have to go up even further in the used car pipeline to the people who actually run the auctions where dealers, like Nick, get their cars.

MATT TRAPP: My name is Matt Trapp, and I'm a regional vice president for Manheim.

ARONCZYK: Manheim is the biggest wholesale car auction company in the country.

TRAPP: In the U.S. market, we will roughly sell about 4 million vehicles in a given year.

ROMER: That's a lot of cars.

TRAPP: It is a lot of cars, yes.

ROMER: The cars sold at Matt's auctions come from all over - car dealers who want to unload their trade-ins or cars they've been leasing out whose leases had expired.

ARONCZYK: They come from finance companies repossessing cars when people default on their loans or from rental car companies selling off cars that they've had for a couple years so they can buy new ones. That is how things usually work.

ROMER: But Matt says things have not been working like usual. And the story that explains why the college kid, Jacob, is seeing such high prices at the lot and the dealer, Nick, is seeing such high prices when he tries to get inventory to sell - that story started a little more than a year ago.

TRAPP: 2020 was an absolute roller coaster ride. When COVID hit, our volume went to about 20% of what we would see in a normal week. You know, we didn't know what to do, didn't know what was going to happen with the economy, what the needs were going to be.

ROMER: Right at the start of the pandemic, travel fell off a cliff.

ARONCZYK: So car rental companies started unloading their cars. Hertz, as you may remember, went into bankruptcy and dumped almost 200,000 cars into the market. Avis cut its fleet by about the same amount.

ROMER: I mean, are you then getting calls from companies saying, like, look; we got 80,000 cars that we need to move. Where can we put them?

TRAPP: Yeah, absolutely. I mean, we received those calls pretty much daily early on. And so our auctions actually became holding pens, and we were wedging vehicles in wherever we could.

ROMER: For weeks and weeks, companies and dealers kept dropping off cars to sell that no one wanted to buy.

TRAPP: There was a moment we were like, you know, if this lasts a long, long time, I mean, we could be just sitting on - if there's real - no real solution to this and the economy just craters, kind of like it happened in '08, I mean, we could be sitting on vehicles for years.

ROMER: But that worst-case scenario is not what ended up happening.

ARONCZYK: Because a lot of people who still had to go into work didn't want to take public transportation if they could avoid it. And people who worked from home started to realize that they could just as well be in Wyoming or Florida.

TRAPP: And then we started to see this rebound. You know, through May and June, the demand started to come back.

ROMER: The auctions that Matt runs actually went through their huge glut in used cars in a matter of months. And before long, they had a new problem, the opposite problem. All the channels they relied on for their supply of used cars started running dry.

ARONCZYK: Because of COVID, car manufacturers closed their plants and dialed the number of new cars they were going to produce way back. And fewer new cars to sell means fewer trade-ins coming into Matt's auctions.

ROMER: But there were these other, weirder things going on, too, like with car repossessions. Because of loan forgiveness programs and stimulus money, the number of people defaulting on their car payments actually went down in 2020. Car repossessions went down last year in a pandemic, which meant fewer repossessed cars showing up at Matt's auctions.

ARONCZYK: And as people started being more willing to travel, they also started renting cars again. So rental car companies were a lot less eager to sell off their cars at Matt's auctions.

TRAPP: You have rental fleets. They're trying to buy. They're not looking to deflate anything. They don't have enough cars. And you hear these stories of people, you know, flying into Denver and trying to get an SUV, and it's $5,000 a week.

ROMER: Shoutout also to the people I read about in Hawaii who started renting U-Hauls instead of going to the rental car companies just because it was cheaper.

ARONCZYK: For Matt, all of these different factors turned a situation where he had a historically high number of used cars into one where he had a historically low number of used cars.

TRAPP: We've never seen anything like this. I talked to, you know, a lot of the guys I work with who have been in the industry twice as long as I have, and they can't recall a time - nothing, nothing at all to the degree to which we're seeing right now.

ROMER: And like Nick was seeing at his dealership in New Jersey and the college kid, Jacob, on his quest in Texas, low supply and high demand means prices are going bonkers.

TRAPP: I mean, dealers are just going anywhere and everywhere they can to find a vehicle. And they're just - they're paying up for it.

ARONCZYK: Prices at Manheim's auctions have increased by almost 50% since a year ago.

ROMER: Now, there is an obvious solution to this whole not enough cars problem. Car companies could just make more cars.


ARONCZYK: And believe me, they want to. They really, really want to. But they can't, for some obvious reasons and some less obvious ones. That is after the break.


ROMER: OK, we know some of you have been walking around your houses or driving in your increasingly valuable used cars listening to us and periodically shouting out, I know the answer. I know why there's a car shortage. It's semiconductors. I know it. And you are right to an extent - gold star.

ARONCZYK: Well done. There is a semiconductor shortage right now. And that is a big problem for the car industry because, of course, these days, your car is as much a computer as it is a big hunk of metal machinery. And all of the computer-y stuff depends on semiconductors, microchips.

ROMER: When I'm in my car, what is being controlled by a semiconductor that I don't realize?

PEGGY CARRIERES: Your braking mechanism, your accelerator, your air conditioning, basically everything.

ARONCZYK: That's Peggy Carrieres. She's a global vice president at Avnet, a giant electronics distributor. Peggy says in a normal market, microchips are pretty cheap. But right now, car companies just cannot get their hands on the ones they need to finish making their cars.

ROMER: So these - like, these $50,000 SUVs are sitting there unfinished because they're missing microchips that cost pennies or a dollar or something.

CARRIERES: I know of, you know, some cases where you have it completely assembled, and it's missing one part. Yes, that's happening.

ROMER: To be clear, Peggy is not the reason car companies do not have enough semiconductors. But since her job is to help companies get the microchips they need, we figured she could at least help us understand what the problem was.

CARRIERES: You know, if you look at 2020, you - I hate to say, you know, what else can go wrong because you just never know. But we had, you know, the pandemic, obviously.

ARONCZYK: But also an earthquake - that was in February, shut down microchip factories in Japan.

ROMER: And fires - three of them, actually - one in a semiconductor supplier, two more at different semiconductor plants, again in Japan.

ARONCZYK: And locusts - just kidding. But there was an ice storm - that giant freeze where Texas lost power. That shut down Samsung's microchip plant for a little while.

ROMER: And even the factories that were not taken out by all of these acts of God, they had a brutal time getting the semiconductors they could make to their customers.

CARRIERES: We've got boats backed up at the docks, the ports. Like Long Beach is backed up big time. And they can't get the products to market.

ARONCZYK: Shipping generally was a giant mess during the pandemic. The car companies were waiting for microchips. The microchip companies were waiting for parts they needed, and all the way down to, like, the raw metal ore to make the parts. Call that the broken supply chain explanation for why there aren't enough new cars and, therefore, not enough used cars.

ROMER: But Peggy says there's another way to think about what is happening with the car industry.

CARRIERES: I think historically, if you look at how the automotive industry has run their forecasts, it's very lean in their inventory model and in their forecast model.

ARONCZYK: What that means is that car manufacturers have gotten really, really good at getting the exact right parts they need from their suppliers to the exact right factories at exactly the right moment, just in time. They don't want parts sitting around in some warehouse for months waiting to be used.

ROMER: So when the pandemic hit, the car companies figured, we're not going to need more microchips until we start up the factories again. We'll just order more then.

ARONCZYK: Meanwhile, demand for semiconductors went through the roof to run all the servers that all the working from home required, to go inside our kids' new iPads so they could go to school remotely. By the time a lot of the car companies realized demand for their cars was going to come back, it was too late.

ROMER: Is it the right way to think about it that they just sort of gave up their place in line and had to go back to the back of the line?

CARRIERES: That's exactly it. That's exactly what happened. And that really was, you know, a mistake that the automotive manufacturers made. In taking their orders out of the queue, they did lose their place in line.

ROMER: And that line for semiconductors - it has gotten really, really long.

CARRIERES: We literally have lead times that are over a year long right now.

ARONCZYK: It's going to be a while before car manufacturers get all the chips they need to make all the new cars consumers want right now, which means it's also going to be a while before the used car market goes back to normal.

ROMER: Matt Trapp, who runs all those giant used car auctions, was not willing to predict when that would happen. But he did have some practical advice.

TRAPP: I tell my friends who are looking to buy a car - they ask me - it's like, Matt, I want to buy a used car. What do you suggest right now? And I tell them no. Why? Why would you? Unless yours is broken down on the side of the road or you really need to change into something different, just hold on. Just wait (laughter).

ROMER: Your job is literally to sell millions of used cars to the United States, and your advice is don't buy a used car right now.

TRAPP: (Laughter) If you - unless you absolutely have to, I'm saying probably wait.

ARONCZYK: New car companies are slowly bringing some of their factories back online, figuring out ways to build cars without all those bells and whistles that requires so many microchips. Maybe you don't need a full navigation system. Production might get closer to normal later this year sometime, or maybe not until 2022.

ROMER: And in the meantime, there are still some used cars out there. I talked to the used car dealer, Nick, the day after the auction. He had the winning bids on both the Ford Explorer and the Jetta with the squirrel/rat's nest under the hood.

ARONCZYK: And Jacob Roy, the college kid in Texas who was looking for a car - he saw a Craigslist post for a gray Honda Civic that he could actually afford. He met the owner, took the car for a test drive.

ROY: When I went from first to second gear, the car would, like, shutter and jump real bad, right? But I was like, that'll work.

ARONCZYK: So Jacob got the guy to come down a few hundred bucks on the price, and that was that. He bought the car just days before he had to drive to Dallas to start his internship.

ROMER: How old is the Civic?

ROY: God, I feel like an idiot just telling you.


ROY: 2007, four-door sedan, 142,000 miles on it, and I paid 4,700. In normal years, this would be garbage, 100%. This would be a terrible price.

ROMER: But 2021 is not a normal year. And prices are just going to be terrible for a little while - for lumber and mattress foam and refrigerators and used cars.


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ROMER: ...@planetmoney.

ARONCZYK: Do I have to do it, too?

ROMER: You do.


ARONCZYK: Today's show was produced by Dan Girma and Alexi Horowitz-Ghazi and mastered by...



ARONCZYK: PLANET MONEY's supervising producer is Alex Goldmark. This episode was edited by Brittany Luse. I'm Amanda Aronczyk.


ROMER: I'm Keith Romer.


ROMER: Thanks for listening.


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