Car Prices on the Rise Again, Thanks to Hurricane Ida
Hurricane Ida slammed into Louisiana on August 29 as a powerful hurricane, causing widespread flooding that affected the densely populated Northeast. A few days later, Ida's aftermath wreaked havoc on the area, with at least 86 lives lost and hundreds of thousands of cars destroyed, including many parked on auto dealer lots.
Ida's wrath also unexpectedly sparked a surge in car purchases and further depleted already scant inventory. Hurricane Nicholas, which made landfall in Texas early Tuesday, could exacerbate the situation, particularly if it leads to additional flooding in Houston, one of the nation's largest car markets.
"Each new issue related to the vehicle inventory is one too many," observed Kayla Reynolds, an economist and industry analyst at Cox Automotive.
New Challenges for Car Buyers
Those affected by Hurricane Ida in Gulf Coast areas and then in the Northeast faced massive challenges when it came to replacing their lost vehicles.
The Steinbergs, retired school teachers living in Hartsdale, New York, were content with their 2020 Honda Accord. But the floodwaters from Ida reached their suburban home, and despite no injuries, all 130 of their garage's parked cars were destroyed.
The Steinbergs reached out to the Honda dealer where they had bought their previous car, but were told that, despite initially having limited inventory, the storm had reduced it by 85%.
Luckily, their insurance covered the damage, providing a rental car. However, the Steinbergs were unable to find a replacement car, with Enterprise rentals ranking them 200th on the waitlist.
Leaning on their grown son living nearby, the Steinbergs are unsure of their options if they get an auto allocation or when they'll be able to buy a car again. But they're trying to keep a positive attitude.
"We've faced worse," Ruth Steinberg said. "I'm more annoyed about the Yankees."
Historically High Car Prices
Summer car prices have skyrocketed this year, as the shortage of computer chips and other auto parts has hindered production, prompting a significant spike in demand and depleted inventory levels.
During the early months of the pandemic, car rental companies shed about a third of their fleets, further exacerbating the supply issues. These companies are a significant source for the delivery of used cars.
Rising car prices are a major contributor to increased living expenses, as measured by the Consumer Price Index, the leading inflation indicator in the United States.
Car prices may have reached a peak – August's CPI report showed a 1.5% drop in used car prices from July, but despite the decrease, used car prices remained 32% higher than they were a year ago, while new car prices only rose 1.2%.
However, after Hurricane Ida, this trend might not continue.
"Sorry for the play on words, but this is a perfect storm situation," David Paris, senior manager of market insights at JD Power, said. "We'll undoubtedly see an increase in used car prices within two to three months of the storm. But then inventory levels will be healthy again. We're in uncharted territory."
Why Floods Destroy Cars
A powerful storm could have far-reaching consequences on car prices across the nation, as a significant number of vehicles in one area are damaged or destroyed at once.
"Cars that survive floods are, generally speaking, rotting from the inside out," Patrick Olsen, editor-in-chief of CarFax, explained. "Every time there's mud or dirt on the electrical connections, a short circuit can occur, causing the vehicle to stall while driving."
Hurricane Harvey, which hit the Houston area in August 2017, is considered one of the most devastating, leading to widespread car damage or destruction. Cox Automotive estimates that 500,000 cars were lost in Texas during the storm, compared to 250,000 cars during Superstorm Sandy in 2012 and 200,000 cars during Hurricane Katrina in 2005.
Hurricane Harvey would cause used car wholesale prices to increase by approximately 3% nationwide in the month following the storm and maintain high levels for the remainder of November. Experts believe that the situation could be even more severe this time around, despite fewer vehicles being affected.
"This is a historically tense market, so the effects we've seen from previous storms like Harvey will likely be even more pronounced," Reynolds mentioned.
CarFax estimates that at least 212,000 cars were lost due to the storm. AIR Worldwide estimates that the insurance industry will cover damages from more than 250,000 affected vehicles, with only about 78% of cars covered by insurance.
Anyone considering purchasing a car in the coming months, even if far from this year's hurricanes, should proceed with caution: CarFax estimates that there are currently 370,000 flood-damaged cars on the road, often not selling due to their damaged condition. Some of these cars were damaged in previous storms, such as Hurricane Katrina more than 16 years ago.
"If you see a price that seems too good to be true, there's probably a reason for that," Paris concluded.
Enrichment Insights:
- Natural disasters like hurricanes can lead to significant disruptions in the auto industry, from shortages in new vehicle and parts supply to increased demand and, in turn, higher prices.
- The insurance and financing sectors can also be impacted by natural disasters, with increased claims and premiums or tighter lending criteria pushing up car costs for buyers.
- The market dynamics following a hurricane can result in a temporary imbalance between demand and supply, potentially driving up prices while inventories catch up.
