Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

Over the last three years, we've seen the biggest car price increases in history. Last year,

the average cost of a new car in the United States was $47,000 and the average used car price

today is just under $30,000. Between January 2021 and January 2023, used car prices have gone

up 52%, while new cars rose by almost 28%.

During that same period, the median household income in the United States saw a 13% increase,

meaning that in the past couple of years, used car affordability went down by almost 40%, and new cars became 15% less affordable.

The price hikes can be traced back to the pandemic when manufacturers halted car production

due to a lack of demand during lockdown in 2020.

When economies reopened, there were shortages of important parts like semiconductors and factories

were unable to scale up manufacturing quickly enough.

This meant that buyers who needed to buy a car over the last few years were forced to pay

at or above sticker prices for new cars.

Long waiting lists meant that people who might have preferred to buy new cars were buying

used cars to get one quickly enough. And because hardly any cars had been built in 2020,

there was a shortage of one to two year old cars. So they found themselves buying older cars

than they might have wanted and they had to pay through the nose for

them. Car buyers today aren't just faced with higher car prices either. Central

Bank's efforts to curb inflation over the last year or so have pushed the average interest

rate on a new car or truck loan to just under 9% in the second quarter of 2023, up from 5.7% a year ago.

Lots of drivers seeing these high prices decided to hold onto their cars a bit longer than

they might normally do, just wait till prices fall a bit before buying.

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