Why Car Ownership Is Getting So Expensive | CNBC Marathon

A car is one of the biggest purchasing such a person will make in their lifetime. But unlike a house, a car starts losing value right away. More than 100 million Americans have an auto loan and auto loan debt in the U.

S. is currently at $1. 5 trillion, a record high.

If cars are to be affordable, they must also be affordable to maintain, and they must be affordable to repair. A car is one of the biggest purchases a person will make in their lifetime. But unlike a house, a car starts losing value right away, literally as you drive it off the lot.

You can keep it spotless inside and out, give it regular maintenance and protect it against every ding, dent and scratch and it'll still lose value. Depreciation, the rate at which that happens, is one of those numbers everyone in the automotive world thinks about. Consumers, automakers and the massive used car market, which makes up somewhere around 40 million sales each year, more than double the sales of new cars.

But in 2020, something strange started happening, turning the car market upside down. Used vehicles were actually increasing for about two years, which we've never seen anything like that for the market. A lot of those trends have abated since, but those odd times led to lasting changes in the post-pandemic world.

There are fewer cars to go around, and prices for both new and used vehicles are still high. That is unlikely to change for a while. Car buyers want their cars to hold value because it will help them get their money back if they decide to sell it at some point, whether they're trading it for a new one or not.

In addition, a lot of car purchases are financed, which means if the resale value of the car dips too low, a buyer could end up paying more for the car than it is worth. That is what it means to be underwater on a loan. Similarly, automakers want their cars to hold as much value as possible, in part because they know customers care about that.

Depreciation also affects how automakers charge for leases, which are an effective way of drawing in new customers but are expensive to run for automakers. Every car depreciates differently. Luxury cars lose value the fastest, sedans lose value faster than SUVs, and cars from brands with strong reputations for quality and reliability depreciate more slowly.

But on average, cars lose about 10% of their value as soon as you drive them off the lot. There are a few reasons for this. One is that we like new cars.

We just like being in a brand new car and it's not brand new once you take it off the lot. The 10% loss in value corresponds almost exactly with another specific number. And that number, say some insiders, is the primary reason a vehicle's value drops that much in the first day of ownership.

Incentives. Most new cars are sold with incentives at one point or another when first purchased by a consumer. An incentive is a discount on a vehicle provided by a manufacturer or dealer to induce people to buy it.

Prior to the pandemic, the average incentive on a vehicle was about 10%. That means on average, new vehicles were sold for about 90% of their MSRP or manufacturer's suggested retail price. And so that car you bought seems to drop by 10% in value the moment you drive it off the lot.

What is actually happening is that the market is pricing in the probability you received a 10% discount or incentive on that vehicle, even if you didn't. It's kind of a messy part of how we do things, because we can't go back and see what the average transaction price is. But we know historically what MSRP is on a year make model combination.

And so we can go see the value of that car against its original MSRP. Another factor, when you sell your car, chances are you are often selling or trading it back in at a dealership. The dealer is going to offer you the wholesale price on the vehicle, what the vehicle would fetch at a wholesale market like a dealer auction.

Those prices are always lower than the retail price. What the dealer would sell it to another consumer for, as there are additional costs and margin that need to be absorbed. That lower wholesale value also makes up part of the depreciation consumers see and feel.

Higher priced cars have higher markups or variants, so there is an even bigger gap between their retail price and wholesale value. But there is a third reason why cars lose value so quickly. An economist named George Akerlof won a Nobel Prize for coming up with this idea.

Akerlof's famous paper is called The Market for lemons, and the idea works like this. In any market, there are information asymmetries. This means sellers know more about the product they are selling than potential buyers do.

If you have a car and it's like three days old or three months old and you sell it, why would you do that? If the car was a good car, you're probably doing it because the car is a lemon. From that first day drop, a car's value slides further about another 10% throughout the first year.

In the second and third year, it drops again and again. Estimates of how much can vary depending on who you talk to and what they are measuring. Again, a car will fetch less money on a wholesale market than it will on a retail market, and maybe during a transaction between a private buyer and seller.

In normal times, a steady supply of new vehicles year after year is enough to drive the value of any given car down. Add to that the normal wear and tear that comes with ownership. It's like your tires wear out, you may get dings in your door over time.

You know, maybe there's a crack in your windshield. Maybe your kid spills juice in the back seat and the you know, the upholstery is messed up and all of that's just wear and tear on a car, which means that it's not worth what it originally was or to put it back in that state, someone would have to invest money to recondition the car back. After about three years, vehicles, on average, historically held about 50% of their value.

Three years is a kind of benchmark for the used car market, because that is the typical term for a lease, and leased vehicles are a large source of vehicles for the used market. There are exceptions to this, of course. Exotic cars, collector cars, limited editions.

Any car that is highly valuable won't depreciate normally and can even appreciate. It is rare for a car to appreciate or increase in value, but those are some that do. You know if you like enough to buy it a new, you might actually sell it for profit.

Some OEMs are trying to fight that. I think Tesla just had in their agreement and they just pull it back again. So you cannot resell their Cybertruck for a year.

At one point, Tesla even threatened to sue resellers for $50,000. It reportedly removed the clause from its user agreement in mid-November 2023, just days before the truck's release, and then reinstated it when Cybertrucks started popping up for sale on the internet. This was also true of exotics like the Ford GT.

Ford sued wrestler and actor John Cena for reselling his Ford GT less than a year after purchasing during the Covid 19 pandemic, as people stayed away from public transportation and flying, used car values skyrocketed by somewhere around 30%. Take your $10,000 used car, but by the end of that year, it was $13,000. So people were buying cars, driving them for a year and then selling them for profit.

It's still your economy 101, strong demand, short supply prices went up. It was just to the extreme that we've never seen before. On top of it all, production shutdowns and supply chain and chip shortages limited the number of cars in the marketplace.

Automakers weren't leasing or selling cars into fleets such as rental agencies. The few cars they were selling were higher priced vehicles that help maximize profits. There were no incentives.

New vehicle supply didn't meet demand, though, which drove customers into the used market. Even rental companies, which had sold off a lot of their fleets at the beginning of the pandemic, were buying used cars at auction to satisfy their own customers. We had two very distinct periods of vehicle appreciation, which is unheard of.

You know, we had prices that moved up into the spring and early summer in 2021, and then they kind of went sideways. And then we got to August, September and they moved up again. And so we ended that year with vehicle prices and values that were much, much higher than what anyone was used to.

Fewer new cars in 2020 means fewer used cars in 2023 and 2024. That pandemic price bump has evened out a bit, but cars are holding on to about 60% of their value after three years, a 10% increase from pre-pandemic times. We expect some normal, more normal seasonality, more normal depreciation, but the baseline for prices is going to be elevated.

So we've reset prices at a high level. A lot of the goods and materials that go into producing a car are still sitting at high levels, even though inflation is coming down. We're not in a period of deflation.

It's highly unlikely that we're going to go back to to having lower car values. The Federal Reserve has raised interest rates in order to rein in inflation, and that has made borrowing more expensive. In the second quarter of 2023, almost 80% of new cars were financed and more than 30% of used ones.

Incentives have increased, some from the lows they're in, but not nearly enough to offset. The average new car price right now is almost 30% higher than it was pre-pandemic time periods. New vehicle production and sales are also about 2 million units below the record 17.

6 million units hit in 2016. That year, the average transaction price was around $34,077. Average transaction prices in October 2023 were around $48,126.

A lot of analysts think that as long as prices stay that high, it will be hard to hit those record volume numbers. And that might be just fine for automakers. A lot of the OEMs have said publicly they don't want to sell that level of new cars.

You know, that they're they're trying to be smarter about producing and over-producing cars and having to over incentivize cars to keep their profits high. But this means that there will be fewer cars available. A new car might only be sold once, but a used car can be, and often is, sold several times.

Constraining the supply of new cars puts a cycle in motion, where the supply of used cars is constrained over and over again. One of the perhaps hidden benefits of depreciation is that it creates a pool of cheap, used cars for buyers who can't afford anything else. The price of a new car in October 2023 was close to $50,000.

That is luxury territory. It took almost 39 weeks, with a median American income to purchase a new vehicle. That is down from a record high of more than 41 weeks in December 2022, but still higher than the roughly 33 weeks in October 2019.

It's the most important factor out there in the marketplace for people. I think there's a lot of consumers that need a replacement car that have been trying to do everything they can to not do that, because they don't want to finance the car and they don't have, you know, $25,000 or whatever to go just pay for it outright. There is a market out there for an OEM that wants to build a more basic product that's new and maybe decontented a little bit, too.

And whoever wants to go after that, I think somebody probably will. I think they'll do really well because that's what consumers need and want. Whether it's a sports car you're excited to rev up for a nice weekend drive or a safe minivan filled with entertainment features for your children, cars are everywhere.

There are more than 275 million vehicles on the road in the United States. People, they equate cars here with freedom. There is this way in which it gives us an ability to explore and see and expand our lives.

But in recent years, owning a car has gotten expressive, really expensive. More than 100 million that have an auto loan and auto loan debt in the U. S.

is currently at $1. 5 trillion, a record high. Outside of purchasing your first home, a new car or an auto is the second largest purchase for most people.

Given the transaction prices and vehicle prices today, financing is required buy these vehicles. In 2023, the average monthly auto loan amount for a new vehicle is $725, up from $650 in 2022. The average monthly payment for a used vehicle is $516 in 2023, up 2% from the prior year.

Meanwhile, consumers don't typically cast their car buying experience in a positive light. It was a very quick process, and I did feel like they just wanted me to sign at the bottom line as quickly as possible. For years, complaints and lawsuits have been popping up left and right against lenders for alleged discriminatory and illegal practices.

It undermines my trust. Our number one priority is to our consumers. And so we have put a variety of processes in place to ensure that is the case.

So what's happening in the auto loan industry and what can consumers do to make sure they're protected? Just like any other loan, an auto loan is a lump sum of money you're given to purchase a car, money you're borrowing and have to pay back over time. Once you've been approved for a loan, often including a down payment, you can drive your new or used car out of the lot, but it's only yours as long as you make monthly payments, with interest, of course.

Take 32 year old Sean Miller, for example. In 2019, he bought a new car for just more than $48,000. He put down about $10,000, locked in a 3.

89% interest rate for a 72-month term, and now makes monthly payments of about $590. By the time the loan is paid off, he'll have paid nearly $5,000 in interest. And then there's a caveat.

Until you fully pay back the loan, the lender holds the title and can repossess the car at any time if you fall behind on your payments. Noelle Saldana was at work when her husband called to say their 2011 Acura had been stolen right in front of their East Orange apartment building, with their one year old daughter, Hannah, in the back seat. It's got back to working.

I got a little behind in my payments. Repo guys going into your driveway the middle of the night and taking your car. That's one way they have these switches that can turn the cars off.

There are direct and indirect lenders. A direct lender would be your local bank, credit union, or an online lender. Once you're approved for a loan through a direct lender, you can then head to the dealership and shop around for your car, just like a cash buyer would.

As for indirect, that's when you go to a dealer and they provide you with financing options as you're buying a car. For example, you might be at a Subaru dealer and you just picked out the perfect car for your family. The dealer sends your financial information to Chase.

Chase checks your credit and other financial factors, and provides the dealer with an interest rate and loan terms. Then the dealer presents you with their interest rate and terms, and if you agree, you sign and get to drive away with your new car. It's more of an all in one process.

And about 80% of auto loans are estimated to be indirect. Now, regardless of if you're choosing a newer used car, or direct or indirect lending, one of the most important factors that will determine the interest rate and loan terms you're offered is how confident the lender is in your ability to pay back that loan. They look at your assets, liabilities, income, expenses, and most importantly, your credit score.

Our primary goal is to put customers in financial products that they can afford. Chase Auto tells us they serve as consumers with a credit score of 620 and higher, with the average credit score typically in the 700 range. Toyota Financial Services holds primarily a prime credit portfolio, meaning they service those with very high credit scores.

They tell us the average is 744. But we do support a larger spread of business, and those with maybe lower ficos may come to the table with larger down payments to help that affordability. Toyota is currently the market leader for auto loans and leases.

In 2022, 5. 3% of total auto financing came from Toyota Financial Services, 4. 4% came from Capital One Auto Finance.

The partnership that we have with the divisions is what makes us extremely successful. We've got a concentration and a focus on our customers and our guests and our dealership partners. According to Toyota, the company's financial services business consists primarily of providing financing to their own dealers and their customers.

The business also provides mainly retail installment credit and leasing sales revenue for the financial services business. For fiscal year ending in March 2023 increased by nearly 21% to ¥2,809. 6 billion from 2022, which is about $19.

8 billion. That's compared to its much larger automotive operations business that saw an 18% increase in sales revenue in 2023 from the year prior. The Japanese automaker is the largest in the world.

The industry is going strong. We're continuing to recover. Consumers are out there buying vehicles.

The demand is there and the lending is there. They are losing their jobs, and these firms are going to go out of business and he's — global chip shortage still hampering car production – the rate of inflation soaring to its highest level in over 30 years. More than half of auto financing is by non-bank finance companies, such as the financing arms of automakers.

These lenders typically rely on short term funding markets for their own financing. So with volatile markets, especially the case of short term funding markets drying up during the global financial crisis, the past couple of decades have kept auto lenders on their toes, to say the least. We went from a time of easy credit to now a time where we're more credit constrained and because of the risk of inflation, even more credit constrained, right.

Because of the interest rates that have gone way up, that is a huge problem. In the first quarter of 2023, the average interest rate for a loan on a new vehicle reached 6. 58%, up from 4.

1% in 2022. That's an about 15 year high. Average car prices are also at a high.

That's partly due to supply chain shortages, higher demand and inflation. That also means Americans take on larger loans at a higher interest rate. In the past ten years, outstanding loan debt has doubled and auto loan debt in the U.

S. is at a record high. Younger Americans are also more in trouble than they've ever been in.

In 2022, $20 billion in Gen Z and millennial debt had fallen into serious delinquencies. I'm paying a ton of money right now for a car that I don't really need. I've been struggling and struggling to sell it.

If I were to sell it today, it would probably be at a $10,000 to $15,000 loss. Miller rented his car out until someone crashed it. He's tried to sell it, but hasn't received an offer that makes financial sense.

It's going to be at least another 3 or 4 years of owning the car before I'm able to pay off the loan. This is something that right now is preventing me from being able to save up in order to start a family. He's not alone with his concerns, and these changes are hitting lower income consumers.

Those with credit scores below 620 the hardest. The Fed's interest rate hikes are squeezing them out of the market. What we're seeing is another manifestation of what we saw during the subprime crisis, which is that lower income people lost their homes and lower income people are having difficulty getting cars, getting mortgages.

And they're also at higher risk of default. Being priced out of the market is just one reason Americans have a bone to pick with the auto loan industry. Besides the notoriously unpleasant car-buying experience, there's also been more complaints and lawsuits related to alleged discriminatory and illegal practices by auto lenders than we have time to get into.

A lot of the auto sales people that I've seen personally, not to say all, but definitely a lot of them are doing it very much in a rushed way in order to get a high markup on a car, in order to get a great commission, but not with the interests of the buyer, not with their financial livelihood, and not with their family in mind. Remember that indirect lending example I gave you earlier with Subaru and Chase, the bank? Or in that example, Chase, provides an interest rate and loan terms, and then the dealer or Subaru presents you with their interest rate in terms, that's often with the markup.

The consumer never sees how much the finance company has said is the minimum interest rate and loan term that they will accept. Let's say, for example, Toyota Finance says that they want the minimum interest rate to be 7%. The dealer can bump it up to 9%, and the consumer never knows about that transaction.

It violates all of our norms about fairness and about the way markets work. It's a convenience. The dealer is providing offering a service.

By arranging financing, that markup becomes profit for the dealer and is sometimes shared with the lender. Chase and many financial institutions do put limits on how much of a premium a dealer can add to the rate that we offer. Putting limits ensures consistency of experience.

Um, across a variety of distributors. Chase auto did not provide us with what its current caps are. Caps on markups vary based on state and lender, but are typically around 2.

5 percentage points. Lack of transparency is just one, but a common reason some consumers feel they're being treated unfairly. One of the more recent controversies was this one.

The Massachusetts attorney general reached a $7. 6 million settlement with Toyota motor Credit Corporation to resolve allegations of illegal auto loan collection practices. The lawsuit claims Toyota failed to give certain consumers sufficient information about the calculation methods for deficiencies left on their auto loans after their cars were repossessed.

I can't comment on that settlement. We stand firmly that our practices are very fair to these specific settlements and fines, I really can't comment because of the specificity of the state allegations and what might be behind it. Back in 2016, a different settlement, that time for $21.

9 million to settle allegations that Toyota discriminated against Black and Asian borrowers by charging them higher rates than white borrowers. Toyota is not alone. I think probably all the major car manufacturers have been hit with lawsuits like this because of the discretionary decision making when it comes to the markups.

Toyota wouldn't comment on that settlement either. Or this report, spanning the entire industry by a former senior economist at the Federal Reserve Bank of Chicago. It claims Black, Hispanic and Asian borrowers often pay hundreds and sometimes thousands of extra dollars in loan payments relative to their white counterparts.

Do you have any insight into why that might be? No. That is something I cannot comment on.

All of our risk-based pricing is based off of Fico score and credit worthiness of the customer. We don't even collect that type of data. That report is not nearly the only one with such claims.

According to this research paper, minority borrowers pay 70 basis point higher interest rates, but default less than non-minorities. These researchers say each year, more than 80,000 minorities are unable to get loans that they would have been approved for if they were white. Whenever people have subjective decision making, that's where the lack of transparency is very problematic.

We spend a lot of time making sure that we understand and are providing affordable lending products to all consumers, regardless of their background. A class action lawsuit was filed in 2017 alleging Chase Auto violated the Fair Debt Collection Practices Act and state law by illegally repossessing consumers vehicles from April 2013 to 2018. In 2018, Chase Auto, its parent company JP Morgan Chase and debt collector Repossessed Incorporated agreed to pay $3.

25 million to settle the case. What is Chase Auto done since then and have business operations changed to prevent future allegations? We undergo a variety of tests of our systems and processes to ensure that they are compliant with all rules and regulations.

And there have been a series of exams and reviews of our process, and we feel confident that we are compliant with applicable law and regulations. For the first time in more than a decade, in 2022, the FTC proposed a rule addressing unfair and deceptive financing practices by auto dealers. The proposed measures include banning bait and switch claims, fraudulent junk fees, surprise junk fees, and requiring full upfront disclosure of costs and conditions.

I've dealt with predatory lending. Multiple members of my family have also dealt with predatory lending and some very sketchy situations, and it's really in our best interest to have some rules in place to make sure that these unscrupulous auto lenders aren't taking advantage of people. But in July 2023, the U.

S. House Appropriations Committee backed a government spending bill containing language that blocks the FTC from implementing its proposed new rules. So what does that mean for consumers?

It means new legislation is probably not around the corner. In the meantime, consumer advocates say more programs are needed to protect Americans buying cars, and that increasing transparency is key. My mother always knew how much bananas cost at every grocery store and went to the store that had the cheapest price.

When it comes to cars, we don't have that ability. Do you believe a consumer should be able to see the rate directly from Chase, regardless of whether or not they're getting pre-approved at home prior to going to the dealership or if they're sitting in the dealership, and that's the first time that they're trying to get an auto loan? Yes.

I think that transparency is critical. And so if a consumer goes to Chase. com, they can see the rate, they can see the terms, and they should be able to see the rates and the term at the dealership or whatever they get their financial loan from.

Until we see changes in the industry, Americans need to look out for themselves. Before getting an auto loan, experts recommend shopping around, check your credit score, get pre-approved online, go to your local credit union and bank, and find out what types of deals you might be able to get before signing anything. Right now, we're finding that the lowest interest rates are with the credit unions.

Average rates within credit unions are closer to the 6% range, whereas the banks are closer to 7% and 8%. You now have digital marketplaces online. There's a wide range of resources now that are available to help customers understand the competitiveness of the interest rates, the terms that they're getting.

Arm yourself with the best information possible. In 2020, Toyota launched Smartpath, a digital retail tool that lets customers shop for cars and apply for financing online. This concept of living room to showroom so that when customers and guests are online researching what kind of vehicle they want, they can have a similar and transparent process.

If you have the means, drive to a second, third or maybe fourth dealer to compare rates and terms and stay away from buy here, pay here dealers. They typically offer the highest interest rates, sometimes for up to 20%. Do your research, ask questions, and don't give up.

Even if it's been exhausting and mentally draining day, we all know the feeling of nerves to see one more, but don't let that push you to sign on the dotted line. If you're not ready, tell the dealer you need more time and you'll come back. Finally, vote.

There are tremendous problems and tremendous solutions, and those solutions are only going to happen if the politicians who are making decisions about federal law, in particular, are willing to take consumers into account. Until we can get politicians to commit to protecting consumers, we're not going to have solutions. Customers definitely are getting sticker shock.

The cost of vehicle repair is rising and there are several factors causing this heavier, more complex vehicles. New materials and manufacturing methods, a worsening shortage of talented technicians, and pandemic induced supply shortages. We're at this, you know, almost inflection point where a perfect storm may be a kind of analogy you could use, where all of these different variables are kind of coming together at once to drive repair costs higher.

The newest segments, such as EVs, are reputedly especially expensive to fix. News reports describe new EV owners shocked by repair bills, but some say there's reason to be optimistic. If cars are to be affordable, they must also be affordable to maintain, and they must be affordable to repair, or else we're going to have fewer vehicle sales.

So I think the automakers are going to be motivated to drive those costs down. We have four technicians and two trainees right now. David Goldsmith has been in the car repair business for more than 40 years.

He owns Urban Classics, a shop in Brooklyn. He says he's seen repair costs rise, especially over the last few years. Customers are struggling to pay the invoices that we give them.

I mean, I've had to cut back on our you know, our profitability is not up. His impressions match data. Repair costs are rising relative to the overall rate of inflation.

From November 2013 to November 2023, motor vehicle maintenance and repair increased 4. 1% per year, an overall change of 49. 8%.

Meanwhile, all items in the Consumer Price Index increased 2. 8% per year, or 31. 7% overall.

The increase has been especially sharp since the pandemic. Ryan Mandell is director of claims performance for Mitchell, a software provider serving the automotive industry, primarily the collision repair and auto insurance sectors. He says the annual rate of increase in the cost of repair was between 3.

5% and 5% prior to the pandemic, but since then it's shot up. In 2022, the number jumped to about 10%, which appears to have held steady since then. For the full calendar year 2023, the average repairable estimate was $4,721.

Mandell says that number will continue to increase as the data matures over the next 3 to 4 months. I'm working harder than I've ever worked and the margins because all my expenses are so high. Labor costs me more, insurance costs me more.

Health insurance, all the professional services that we get. Everything costs more. An important distinction to make here: maintenance versus repair.

Maintenance usually involves checking, replacing or replenishing something expected to wear down or deplete over time. Your tires, wiper blades, oil transmission fluid. Repair is fixing something that is broken that can be due to a product defect, a clumsy hand, or what is often the case, a crash.

Matt Moore is a researcher for the Highway Loss Data Institute, a division of the Insurance Institute for Highway Safety. It's an organization funded by the insurance industry to crash test vehicles and do other research around collisions and vehicle safety. Moore says several factors could be to blame.

It could be that vehicles are more expensive to repair. It could be that crashes are more severe, cars are a lot heavier than they used to be, and a lot more powerful. Between 1985 and 2022, on average, vehicle weights increased by about 33%.

Meanwhile, average horsepower increased by over 100%. If vehicles are heavier when they're getting into crashes and or they are going faster when they get in the crashes, you're going to have more energy in the crash. More energy in the crash means more damage to the vehicle, more damage to the vehicle, higher repair costs.

Meanwhile, in recent years, speeding and traffic crashes have increased. At the same time, the proliferation of what are collectively called active safety technology, such as automatic emergency braking, have reduced the number of low speed accidents. A lot of these features don't work or don't work as well at higher speeds.

That has led to mean shifting, where the overall data set has become skewed toward more severe crashes simply because less severe, lower speed crashes are not happening as often. Cars are also loaded with a lot more stuff, which means a lot more can go wrong. About 17% of the registered vehicles in the U.

S. are turbocharged, a tweak that squeezes more power out of an engine. In recent years, automakers have used it to make engines smaller and more efficient.

It adds a lot of extra parts: the turbocharger, plus additional exhaust pipes and additional cooling system, and so on. The number of all-wheel drive vehicles has skyrocketed. In the 1980s, about 10% of them came equipped with it.

In 2022, 66% did. All of these systems increase complexity and weight on an automobile, partly to compensate for the increased weight, but also to maximize fuel efficiency, performance, or maneuverability. A lot of automakers have increasingly used lighter weight materials.

Aluminum is one. It is more brittle than steel, so it cracks in a crash instead of bending and deforming, that disperses the crashes energy better. But because cracks are harder to repair than, say, a dent, aluminum panels usually need to be replaced.

New manufacturing methods like mega casting or giga casting allow automakers to dramatically reduce the number of parts on a vehicle, a part of a. Car that might have been made up of 50 or 60 sheet metal pieces can now be made with just 2 or 3 very large ones. But again, that means when something breaks, a much larger piece needs to be fixed or replaced.

Change doesn't stop there. Automobiles have entirely new types of technology in them. Your average regular car now is is basically a rolling network of computers.

That's been kind of slowly developing for decades now. But really, we saw in the last ten years the technology and vehicles changed dramatically to where you now had many different not just, you know, single safety systems, but many different safety components that were being added to these vehicles to help protect drivers and to reduce accident frequency. It adds up quickly.

You know, we had a guy in with a Dodge pickup or a Jeep the other day and he's his lights are going crazy on the dashboard. And he had to decline the repair because it was a radar built into, uh, a little sensor on his grill that got cracked. And it was $1,500 just for part.

And you potentially have to recalibrate these systems again, even if they haven't been damaged. So we've seen that really ramping up significantly since 2015. The incidence of the presence of these different operations if you look at the average cost of doing a just a series of scans of the computer system on a vehicle, you're talking about an average of about $160 per claim.

When you talk about calibrations, that's more like $500 per claim. Over there in the corner there, we've got scan tools $10,000, $12,000, $9,000 and then the training that's involved, of course, we've got to send send our guys out for training. I have guys that come to me that have been out of the business for five years, and they go like, whoa, where'd this come from?

Finding enough talented technicians is one of Goldsmith's biggest challenges. The Covid 19 pandemic exacerbated a long standing shortage. In 2019, the average labor rate was under $50 an hour in the U.

S. At the end of 2023, it was close to $60. Most of those increases came in 2022 and 2023.

Well, when the pandemic hit, all hell broke loose. A lot of a lot of people, like, in a lot of industries, a lot of the older guys, uh, and some gals, they just said, I'm done. You know, I've worked, you know, 20, 30 years in the business.

The pressure is too much. The volume of miles traveled shrink drastically during the peak Covid months. You saw really the volume in repair facilities dry up.

And so a lot of technicians left this industry, and we look for industries and sort of collision repair outside that going industry and to attract and talent to attract local talent, especially shops need to pay more to be able to get that to be the employer of choice, and that's really driven a lot of these labor rate increases, along with just the overall general economic environment. Goldsmith pays some path techs six-figure salaries, and he is trying to train his own techs rather than try to attract those at the skill level he would ideally like to have. They deserve it.

They, every penny of it. I wish I could pay them more. They're highly trained and hard to come by.

The pandemic also drove up the cost of parts. Mitchell tracks a CPI-like basket of the most commonly replaced collision parts. In one analysis, the prices of those parts rose from 0% to 4% annually from 2017 to 2021.

Disruptions at ports, especially in eastern China, spiked the cost of ocean-going cargo. The average cost of moving a 40 foot container went from $1,200 to almost $12,000. In 2022, Mitchell saw almost a 17% increase in the average cost of aftermarket parts, compared with the usual annual inflation rate of 0% to 4%.

The OEM version of those parts has increased a little more steadily, around 10% to 12% in 2022, or about 14% or 15% in 2023. One of the great promises of EVs is that their simplicity compared with gas-burning cars, means they ought to cost less to maintain and repair. But they have come under scrutiny lately, as some owners describe being saddled with pricey repair bills, some totaling half the value of the vehicle.

In spite of these horror stories, many industry insiders say the total cost of owning a car should fall as EVs become more popular. They use fewer moving parts, there's no oil to change, there are extremely simple transmissions. Wildly expensive EV repair bills may have less to do with EVs themselves, and more to do with the fact that the ones on the market today are, one, essentially luxury vehicles, and two, are made by either startups or relatively young companies that do not have mature supply chains and service networks.

It's very difficult to paint electric vehicles with a broad brush. There are Nissan Leafs, which are electric vehicles which are relatively small and relatively inexpensive. And then at the other end of the spectrum, you have the Lucid Air, which is a cost in excess of $100,000, and some versions of that vehicle make 1,111 horsepower.

Some EV models have a nearly identical ICE counterpart. The Highway Loss Data Institute compared the costs of repairing those, and found that EVs were just 2% more expensive. When you look at the total EV fleet versus the ICE fleet, there is at first about a 35% difference in repair costs.

But when you drill down and compare the cost of repairing, say, a Kia Soul and Kia Soul EV, that difference almost disappears. What is left, Mendell says, is the cost of managing an EVs high voltage battery. That includes ensuring it is protected, assessing it for damage and keeping technicians safe from the voltage.

There can be several hours additional labor involved, including battery removal. For example, urethane clear coats that seal paint jobs are baked at very high temperatures, which is hazardous to batteries. For some EVs, battery removal could require up to five hours of labor.

But a lot of this comes down to the fact that EVs are marketed as the vehicle of the future, and as such, often target higher end buyers in addition to their still new and rapidly evolving batteries, motors, and other unique tech, they're also loaded with a lot of the features often found in premium and luxury vehicles. The EVs are really at the forefront of that complexity revolution. The EV industry, it's in a nascent stage, so it's early, we're doing lots of learning.

I think once it settles down and there's lots of learning that occurs in the dealerships, in the manufacturing plants, in the design houses, I think EVs are going to be a really terrific proposition for people long term.