Patrick Jankowski, senior vice president of research for the Greater Houston Partnership, spoke with Community Impact Newspaper on Aug. 9 about how the cost of transportation is impacting local commuters and the economy. This interview has been edited for length and clarity.
How have vehicle sales trended over the course of the pandemic?
Well, obviously we were doing well up until March 2020. So far this year through June, we sold 118,746 new vehicles. That compares to last year through June, 116,051. Compared to that time in 2020, we sold 89,362, so you can see the significant jump of 32.9%.
During the early stages of the pandemic, everyone was frightened. They didn't know what lay ahead of them. You didn't want to spend any money because you did not know if you were going to need that money further down the road, and people just stopped buying cars. Whether a new or used car, they only bought it if they absolutely needed it.
In March of 2020, we sold 17,425 [vehicles]. The following month it dropped down to 9,657—almost in half. Then we started to see it pick back up in June, July and started seeing pretty healthy automobile sales in August and September 2020, and that’s what’s been driving the increase in prices.
Initially, it was people getting caught up, and now people are feeling a little bit more comfortable about their financial situation and willing to take a 48- or 60-month note and buy a car. I look at vehicle sales as a good indicator of consumer confidence. Most people aren’t going to go out and buy a new car if they're worried about losing [their] job in the next six months.
And we're still seeing nice growth in automobile sales—not outstanding growth, but nice growth.
As you mentioned, the cost of vehicles is up. Is that all demand driven, or are there other elements at play?
It’s basically supply and demand—the manufacturers cannot produce enough vehicles to meet demand. And they can't produce enough vehicles because of the shortage of not just chips, but because of other things now. Most people don't realize that we imported palladium from Russia, and palladium goes into catalytic converters. So if you think we're seeing a rash of catalytic converters thefts now, wait six months; you’ll probably see it spike even more.
It's just the shortage of parts. To kind of put it in perspective, in February of 2020, the auto industry was on pace to manufacture 16.9 million vehicles in the U.S. on an annualized basis. Right now, they're on track to only manufacture 13.3 million. To put it another way, in February 2020, there were over 500,000 vehicles on dealers’ lots to be sold [nationwide]. In July of this year, there were fewer than 100,000, so that is one thing [that] has been driving prices.
[Additionally,] if interest rates go up, the cost of financing a vehicle’s going to go up as well. We're already starting to see that, and that's going to make monthly payments more expensive. Either that or we're going to [see] people who are going from 48- to 60- to 72-[month payment plans]—I've even seen some dealerships advertise 84-month payments.
... Another way to look at the cost: At the beginning of 2020, the typical new car buyer was financing $32,000 after putting down their down payment. Right now, the typical car buyer is financing $38,000. So if you add the fact of having to finance a bigger amount and the fact that we know interest rates are going to continue to go up at least another one to two percentage points this year, if not more, it's going to make purchasing cars even more expensive.
What advice would you have for someone looking to buy a vehicle right now?
Two factors come into play. One is if you find a car you like or if you find a car that's 95% of what you like, you should buy it. You’re not going to find the perfect car, especially in this market. If it's really close to what you want, don't hesitate because it's not going to be there tomorrow.
And the other thing is if you're secure in your job, you need to go ahead and finance a car now because interest rates are only going to go up. Are inventory issues expected to improve any time soon?
Well, it's going to depend upon if prices go up, I would expect inventory would improve ... because fewer people will be able to buy cars, and so there's going to be more available. And at some point, we're going to get the supply chain issues resolved, and there will be more available. So inventories will go up, but I'm not expecting it to improve significantly in the next three to six months.
Are there any notable trends when comparing the new vehicle market to the used vehicle market?
The one thing I can let you know is that the rate of price increases for used vehicles has slowed down. Coming out of the pandemic, we were looking at price increases of 30% or more. [The average price of] used cars and trucks from June 2021 to June 2022 went up only about 7.1%. That's still a lot, but for new vehicles, the price went up 11.4%.
There are a couple of things that impacted the used vehicle market early on. One of the sources of used vehicles is car rental agencies ... because Avis and Hertz are having a hard time buying new vehicles to rent, they’re holding onto their vehicles a little longer. [Typically], they might let it go in a year or a year and a half, and now they're holding it off for two years or more. So those vehicles are not coming onto the market as used vehicles, and so that's one reason why used vehicle prices were so high for so long.
Earlier this year, we started to really see gas prices increase. What caused that increase?
There was a combination of things. One of those was we entered the summer driving season with low inventories. Also, people were driving more, so the demand was up. We had crude prices spike, and those are probably the three biggest factors.
Also, Russia not only exported crude, but it also exported refined products. ... So definitely the war between Russia and the Ukraine had an impact on gasoline prices.
And one of the things people don't realize is we've lost in the U.S. roughly 1 million barrels a day of refining capacity over the last few years. What we saw was companies that were in the refining business, they either converted their refineries to things like biodiesel or other products other than gasoline, which meant that output wasn't available. Others simply shut them down because they were no longer profitable, or they didn’t think they would be profitable.
... With this really big push, this need to deal with climate global climate change, and the shift to electric vehicles, ... [oil and gas companies] are reluctant to invest $1 billion in a new refinery if they think 10 years from now there will be very little demand for the product it's producing.
People are driving less because gasoline prices have gone up. Also, school has already started in some districts, so you don't have families on vacation. So all those sorts of things are coming into play.
... Of course, we all wish it was the way it was back in June of 2020. That's unrealistic because we were coming out of a pandemic, and so no one was driving; no one was going to work; people weren’t going on vacation.
The U.S. Energy Information Administration publishes something called the Short-Term Energy Outlook, and that's where I go to get their forecast. The outlet that they put out in July, they said they expect gasoline in the Gulf Coast to average about $3.21 a gallon in December. So we’re looking at not as dramatic of a drop as we've seen over the last six weeks, but a slow steady decline.
