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Why Haven't Car Prices Fallen as Far as Houses?
Old 03-03-2009, 06:30 PM   #1
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Why Haven't Car Prices Fallen as Far as Houses?

With today's bad news on US car sales, I got to wondering why car prices haven't fallen as much as house prices. There certainly seems to be a vast oversupply. Are the car makers reporting huge loses because they are unwilling to drop prices enough to boost sales? In some areas home prices have gotten low enough to attract investment buyers. It would seem the car makers would lose less money if they sold their current inventory at a loss rather than getting no revenue while they sit on a lot. Am I missing something here?
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Old 03-03-2009, 06:32 PM   #2
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Because the cost of labor and materials puts a lower bound on what can be charged for a car. Plus, most of the value in the housing markets where the bubble grew was in the land, not the structure. The value of the structure itself isn't likely much changed, and for sure its "replacement cost" for insurance purposes hasn't gone down much, if at all.
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Old 03-03-2009, 06:33 PM   #3
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...better to wait for the next round of bailouts, i.e AIG.
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Old 03-03-2009, 07:46 PM   #4
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Perhaps because used cars as a rule NEVER APPRECIATE and have a far more limited usable life expectancy?
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Old 03-03-2009, 07:58 PM   #5
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But still, you'd think the new car dealers would lower the prices (even below the cost of manufacture) until the backlog was snapped up. Then they could lower the rate at which cars are produced, to the point at which they could raise the prices again, perhaps even higher than they are now, and make some money. They sure aren't making any money now, apparently.

Then again, I don't know much about business.
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Old 03-03-2009, 08:03 PM   #6
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Seriously. Good question. I was checking prices randomly today for smaller honda sedans. Most are selling right around MSRP +/- $500-$1000.

Economic theory suggests that when a subsidy (like the current sales tax credit) is introduced, the market equilibrium price will rise. Maybe an unexpected consequence of our fearless leader's benevolence?

Anyone else wondering if house prices remain artificially inflated because of government intervention in the housing market? Any investors waiting on the sidelines with cash getting frustrated because the deals just aren't available like they should be?
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Old 03-03-2009, 08:25 PM   #7
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Mostly because there was no bubble in autos as mentioned earlier. Dealers can't sell below thier cost from the manufacturer. With domestic automakers getting gov't money, it might appear irresponsible for them to sell below thier cost. Some would be surprised if they actually went into a dealership and did some hard bargaining if they have good credit. A lot of the lost sales were going to purchasers with marginal credit. Many others have employment security issues. My employ laid early retired 12% of us in 12/08 and just laid off another 4% last week.....1st time that ever happened. OTOH, DD and I were at the local Chevy store this weekend and the joint was jumpin!
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Old 03-03-2009, 10:07 PM   #8
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Quote:
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Because the cost of labor and materials puts a lower bound on what can be charged for a car. Plus, most of the value in the housing markets where the bubble grew was in the land, not the structure. The value of the structure itself isn't likely much changed, and for sure its "replacement cost" for insurance purposes hasn't gone down much, if at all.
The cost of labor and materials puts a lower bound on "new construction" also in most locales (certain areas of the country excepted - you know who you are)

Personal example: Although I would like to be in the market to sell the house I have now - our local market is not too badly hit (yet?) - there's a certain price below which I'm just not gonna go. I don't "have" to move & not every seller is in a "have to" move situation either. I probably won't be asking a "new construction" $ per sq ft price - but I won't be going drastically below it, either.

Of course I realize there are a certain number of existing home sellers who "have to" sell their house (relocation, job loss, etc) for whatever price it will fetch. But if the market offers are far below what they still owe on their mortgage, well .........

Sure you can maybe pick up a foreclosure home on the cheap nowadays - but many of those (because they are foreclosures) may require significant repairs, clean-up, etc. Not every buyer is up for that. They may not be in areas you want to live in. And they are not all necessarily "bargains" for the average homebuyer who needs a house they can move right into with minimal hassle.

As to new cars - I expect the existing surplus inventory to slowly get sold over the next year or so - at what price, well that will vary, there will be some bargains & there will be some not-such-a-bargains - I fully expect in the next year both foreign & domestic auto manufacturers will downsize & slash production - so there won't be as many new cars available in coming years. (They'll still cost the same though - perhaps even more)

(What ticks me off, currently having the POV of a prospective home seller, is government programs to provide tax credits to people who buy "new construction" homes - it devalues the resale market) Home builders expect boost from state tax credit
Reason #244 I'm now glad I didn't take that job in Cali'
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Old 03-03-2009, 11:00 PM   #9
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I wonder, too, if the home and auto markets aren't elastic in different ways for buyers and sellers.

Homes:
Buyers \: Need a house, but can put off buying by renting if home prices are high. Much elasticity.
Sellers: Sometimes are in a "must sell" situation (can't make payments, job relocation, etc) (Overall less elasticity than home buyers enjoy)

Cars:
Buyers: Some are in urgent need of a car (crashed previous car, or it suddenly needs expensive repairs). No realistic option to rent long term, and leases are less available than in the past. So, for some buyers, little elasticity.
Sellers: Few people have to urgently sell a car (no pressure due to job changes, variable interest rate hikes, etc). Overall, greater elasticity than car buyers.

This, along with the factors previously mentioned, might help explain why car prices have held up better than home prices.
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Old 03-04-2009, 05:36 AM   #10
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I have seen this argument a couple of times before. It goes something like the people that delay purchasing a new care and just drive to old one longer will eventually get new cars. I guess the manufacturers feel if they can cut the amount of cars coming off the line they will be able to maintain the prices and when demand increases (and it will eventually) they can actually increase the prices. Not sure if this will work "this time" but maybe "Cardude" can jump in here and give some of his experiences.
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Old 03-04-2009, 07:25 AM   #11
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Personal example: Although I would like to be in the market to sell the house I have now - our local market is not too badly hit (yet?) - there's a certain price below which I'm just not gonna go. I don't "have" to move & not every seller is in a "have to" move situation either. I probably won't be asking a "new construction" $ per sq ft price - but I won't be going drastically below it, either.
Sure, but the "bubble" tends to be in the land, not in the actual home itself. When home prices are cratering it's mostly the land that's dropping in value, not the structure itself.
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Old 03-04-2009, 07:32 AM   #12
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Unlike new cars - housing markets are very local.

How big was the bubble in residential lots in the "Texas Hill Country" in the past 8 years? No doubt there was a bit of one - but how much of a percentage of the average new home value was affected by the increase/decrease in land prices?
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Old 03-04-2009, 07:36 AM   #13
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Unlike new cars - housing markets are very local.

How big was the bubble in residential lots in the "Texas Hill Country" in the past 8 years? No doubt there was a bit of one - but how much of a percentage of the average new home value was affected by the increase/decrease in land prices?
Not much of a bubble here. We haven't declined much, either. Maybe a little bit, but this is one of the healthier housing markets around. Labor costs are quite low, for one thing, compared to most cities. The market's actually been pretty flat -- so far.

The "local" aspect of the housing market is, again, largely influenced by the land and to a lesser degree by labor costs. The latter is reflected in the value of the structure to some degree (and for sure, the replacement cost of a home for insurance purposes).
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Old 03-04-2009, 07:48 AM   #14
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Quote:
Originally Posted by Texarkandy View Post

How big was the bubble in residential lots in the "Texas Hill Country" in the past 8 years? No doubt there was a bit of one - but how much of a percentage of the average new home value was affected by the increase/decrease in land prices?
Far from perfect, but this chart of Austin home asking prices will give an indication of home price trends in the HC area the past 2-3 years:
Attached Images
File Type: png Austin home price chart.png (12.8 KB, 5 views)
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Old 03-04-2009, 08:32 AM   #15
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So to answer the OP question: Why Haven't Car Prices Fallen as Far as Houses?"

Housing markets can be heavily influenced by local factors.

New cars pretty much cost the same no matter where in the US you buy them regardless of local factors.
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Old 03-04-2009, 10:33 AM   #16
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The auto market had too much supply before- too many dealers selling (or trying to sell??) too many new cars. This correction will correct the supply (put dealers out of business) before it will correct the price point.

The price point is more related to fuel efficiency (IMO)- most economical vehicles (like a Corolla, Camry, Sentra, Maxima, or Accord) are probably sold at just over MSRP ($1000 profit on a $15,000 car is 6% profit margin). The markup/margin on less efficient milage vehicles (F150, Ridgelines, SUV's, minivans) is much higher (might have $3000-$5000 markup on a $30,000 vehicle, close to 10%-16% markup).

The gas prices in early 2008 corrected the demand on the larger vehicles before this, but that did not necessarily increase demand for the smaller cars, people just bought less cars, and that corrected the "supply" issue I presented already.
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Old 03-04-2009, 01:14 PM   #17
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This would create cashflow, but it wouldn't solve any but the most immediate of problems. Only prolongs the agony. It's the equivalent of bailing out a boat with too small a bucket. You work your ass off, but the result is the same. A sunk boat.


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But still, you'd think the new car dealers would lower the prices (even below the cost of manufacture) until the backlog was snapped up. Then they could lower the rate at which cars are produced, to the point at which they could raise the prices again, perhaps even higher than they are now, and make some money. They sure aren't making any money now, apparently.

Then again, I don't know much about business.
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Old 03-04-2009, 02:24 PM   #18
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IMO most of the posts miss the main point... there are variable costs and fixed costs... you do not sell anything below the variable costs... but even that is not the main point...

Most homes being sold are USED, not new... the discounts for new construction is not near as much as existing houses... especially if it has not yet been built...

The home builder will not sell you a home (that has not been built) at any price CHEAPER than the cost of his variable costs... labor, materials etc... if he does, he is out of business...

Now lets look at price... house prices were a lot higher than what was prudent (hence higher profit for new construction), so dropping the price is getting back to normal... Car prices were already 'low' in most cases and do not have as far to go before you hit that variable costs limit..

And in a sense, the discount IS pretty big... I read a few days ago that the average discount for a car sold is in the $2500 or so range (could be off $500 either way)... So it appears that the discount is about 10% which if you look at the whole USA, that might be the decline in RE.. as someone else said, RE is local so it is hard to see an average...
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Old 03-04-2009, 03:45 PM   #19
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I live in an area that, at least until very recently (Dec. 08), has had record car sales (I haven't seen any 09 stats). I bought a year old 07 Ford Ranger last June for about MSRP - 27% of new 08. For a new 08, I'd have been lucky to get 10% then. Recently I've seen ads for new 09 similar to mine for about $1K above what I paid used (that's before all the delivery, setup and other * hidden charges). Since, believe it or not, car dealers aren't hurting big time in my area, I think the prices they pay are falling and people here are getting deals.
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Old 03-04-2009, 06:49 PM   #20
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Because you can live in your car but you can't drive your house........
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