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CARDIFF GARCIA, HOST:
Hey, everyone. It's Cardiff. This is THE INDICATOR FROM PLANET MONEY. And today I'm joined by a special guest, Camila Domonoske from the NPR Business Desk. Camila, how are you?
CAMILA DOMONOSKE, BYLINE: I'm all right, Cardiff. How are you?
GARCIA: Doing great. And you have brought us this really great story about something that we on THE INDICATOR touched on a few months ago. It's about this kind of mystery in what's happening with used car prices.
DOMONOSKE: Right. So there's this very basic rule, this law of economics when it comes to cars. They go down in value over time. They depreciate.
GARCIA: The minute you drive a car off the lot, that's it. It immediately has lost a ton of value. And it only gets worse as the car gets older.
DOMONOSKE: But this year - I mean, 2020 - I feel like I say this all the time. This year, something weird happened.
GARCIA: Yeah. Down is up. Up is down. I mean, nobody knows what the heck's going on.
DOMONOSKE: So in this case, I talked to a guy named Aaron Springer. He owns a Volkswagen Jetta SportWagen. It's a 2014. He bought it used a couple of years ago. So far, that's, like - nothing weird about that. But this summer, he heard that car prices were getting hot.
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AARON SPRINGER: I decided, you know, I'm not really looking to sell it. I love this car. But let me go see what exactly they're paying. And it was big.
DOMONOSKE: Carvana, the used car site, offered him $1,500 more than he paid for it in 2018.
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SPRINGER: I mean, it's just too good of a price to not sell it.
DOMONOSKE: So what happened here and happened all over America is that used car prices in general went up so much and so quickly that they could cancel out the rate of depreciation - in some cases, by a lot.
GARCIA: Well, we are going to find out why this happened, and we're going to solve this mystery. But you've got to wait until after a quick break.
OK. So this really unusual movement in used car prices - it comes down to the usual principles of basic economics, supply and demand. When supply goes down, the price of that thing goes up. And when demand for it goes up, the price of that thing also goes up. And in this case, both of those things are happening. Supply is going down. Demand's going up. Camila, let's start with supply. So what happened there?
DOMONOSKE: Reason No. 1 why the supply of cars went down is the world stopped making vehicles. Jonathan Smoke is an economist with Cox Automotive.
JONATHAN SMOKE: Literally every factory in the world that feeds vehicles to the U.S. market were shut down between six and eight weeks.
DOMONOSKE: This was a safety measure to stop the spread of COVID, and it created a supply shortage in the new car market that quickly started to affect the used car market, too.
GARCIA: OK, that one makes perfect sense. What is the second reason?
DOMONOSKE: Supply shortage reason two is fewer repossessions. This is normally a source of used vehicles entering the market. But between the financial crisis and the pandemic, this has been a really devastating time to lose a vehicle. So some states put a moratorium on car repossessions.
GARCIA: OK, we're cooking here. Reason No. 3 is there's a supply shortage in used cars.
DOMONOSKE: Reason three is no one was renting cars. So normally, companies like Hertz and Enterprise are constantly buying brand-new cars and selling off cars that have been driven for a year or two. This injects, like, 2 million cars per year into the used-car market. But this spring, the rental car industry just hit the pause button. Here's Ivan Drury. He's with the auto data company Edmunds.
IVAN DRURY: They've held onto those vehicles. They didn't order new inventory because no one was driving what they already had. So we kind of had a drought in that near-new used segment.
GARCIA: Worth noting here that some people had been predicting the opposite, that there would actually be a lot of rental cars kind of hitting the market all at once because people wanted cars. And that's what you'd expect.
DOMONOSKE: Right. But the rental car companies were like, no, we don't need to sell these. We're just going to wait until people rent them again. All right - one more reason for you.
DOMONOSKE: Supply shortage reason No. 4 is lease extensions. So if you had a leased vehicle and your contract was ending in March or April or May, who wanted to deal with replacing it during a lockdown? A lot of people just extended it for a few months. And those cars didn't enter the market the time they normally would have, either.
GARCIA: OK, excellent - four reasons why there's been a supply shortage in used cars, pushing their price up. And we're only, like, halfway through all the reasons because now we got to cover the demand side, demand for used cars going up. So give us the reasons for that.
DOMONOSKE: Again, a whole bunch of factors here - but reason one why demand started to go up was the stimulus. A lot of people, when they get a chunk of cash, put it toward a car. You see it every year with tax returns, and you definitely saw it with those CARES Act checks.
GARCIA: Yeah, that makes sense. Stimulus checks stimulate demand. There's money there. Money to spend, higher demand - got it.
DOMONOSKE: Reason two why demand went up was the fear of getting sick, particularly for people who used to rely on buses or subways. Simone Baptiste is with Vehicles for Change, which takes in donated cars and helps low-income workers buy them.
SIMONE BAPTISTE: During this pandemic with the social distancing, to get on the public transportation when you're with other people - it does help to have your own vehicle.
DOMONOSKE: Unfortunately, a lot of the people most worried about this - low-paid workers who can't telecommute - they often have the hardest time affording a vehicle, and that was even before prices went up. Baptiste says her group has gotten more requests for help during the pandemic. But in the same category, you also have some affluent city dwellers who have been carless by choice. They might have an easier time going out and getting a vehicle.
GARCIA: And in both cases - both low-paid and high-paid workers - you've got people who did not own a car before the pandemic, and now they want to change that. Now they do want to own a car.
DOMONOSKE: Right. And then there's reason No. 3 demand went up, which is people who did own a car before but now want a different kind because the pandemic changed their lifestyle. Maybe they work from home now or they moved. Jonathan Smoke, the economist with Cox Automotive - he says maybe you liked a smaller car for your commute.
SMOKE: But now what you're doing is taking the family on road trips or doing more projects at home and going back and forth to Home Depot. Then that larger SUV and pickup truck may be more attractive.
GARCIA: Also, a lot of people just want to look tough in a big car.
DOMONOSKE: Always true.
GARCIA: Anyways, moving on, any other factors driving demand up?
DOMONOSKE: Well, yeah. People who still have jobs might actually have extra money to spend because they aren't spending it on restaurants or sport games or airplane tickets. Plus, interest rates are low, especially if you have good credit.
GARCIA: OK, so tie it all together for us.
DOMONOSKE: Supply of cars went down very early on in the pandemic, and then demand for cars started to get really high, even for an economic crisis. And everyone is competing for that smaller pool of cars - pushes prices up and up and up.
GARCIA: And there we have it. Camila, you have cracked the case of the soaring used-car prices.
DOMONOSKE: It was a conspiracy - eight culprits cooperating (laughter).
GARCIA: This book will not sell as many as, like, "The Hound Of The Baskervilles." But still, it was a great episode. But before we let you go, Camila, I'm wondering if you can sort of tell us what this means for different groups of people. I imagine there are some people who are going to benefit from this trend and some people who are going to be hurt by it.
DOMONOSKE: Right. So the people who are hurt is anyone who's trying to buy a used car right now, especially anyone on a budget who is looking for a bargain. It's just really, really hard to find an affordable car out there right now.
GARCIA: All right. And who's winning from this trend, from higher used cars?
DOMONOSKE: Well, anyone who sells used cars, including ordinary people with a car in their driveway that they might be willing to part with, car dealers, obviously, rental car companies. It's also actually really good news for car manufacturers. That's a huge relief for the industry because normally, during a recession, car prices go down and stay low for a while. But here we are in an economic catastrophe, and used car prices went soaring. Have I mentioned that 2020 was a weird year?
GARCIA: Down is up. Up is down. Nobody knows what the hell is going on. But I do know, Camila Domonoske, that we really appreciate you bringing us this story. Thanks so much.
DOMONOSKE: Thank you so much for having me.
GARCIA: This episode of THE INDICATOR was produced by Brittany Cronin, with help from Gilly Moon. It was fact-checked by Sean Saldana and edited by Paddy Hirsch. THE INDICATOR is a production of NPR.
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