Why did the price of cars rise in the US?
2:16
New York (CNN Business) -
Just when car prices appeared to be falling from their all-time highs in the United States, they are heading skyward again.
It's Hurricane Ida's fault.
Ida caused widespread flooding from Louisiana, where it made landfall as a hurricane on August 29, to the densely populated northeast, where its debris struck hard a few days later.
Ida killed at least 86 people and the floodwaters destroyed hundreds of thousands of cars, including many that were on car dealer lots.
Communities across the US go through the long recovery process more than a week after Hurricane Ida hit
Ida's anger has simultaneously created a sudden demand to buy cars and destroyed already scarce inventories.
Hurricane Nicholas, which hit the Texas Gulf Coast early Tuesday, could compound problems, especially if it floods again in Houston, one of the largest markets in the United States.
The storms couldn't have hit at a worse time.
"Any new problem with auto inventory is one more problem," said Kayla Reynolds, manager of economic and industrial insights for Cox Automotive.
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New problems for car buyers
That spells big trouble for the thousands of people who lost their vehicles when Hurricane Ida hit the Gulf Coast, before breaking into the Northeast.
Retired school teachers Ira and Ruth Steinberg were happy with their 2020 Honda Accord. Then the debris from Hurricane Ida hit the suburban town of Hartsdale, located about an hour north of New York City.
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A flash flood tore through the condo's garage doors and inundated it.
No one was injured, but the 130 cars parked there were lost.
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The Steinbergs called the Honda dealer where they had purchased their previous car.
"He said he didn't have many cars to start with and that he had lost 85% of his cars in the storm," Ruth Steinberg said.
Fortunately, the Steinbergs' loss is covered by their insurance, which has the benefit of being able to rent a car after a loss, but they can't find one.
They are number 200 on the Enterprise rental list.
The couple depends on their adult son, who lives nearby, to get around.
They don't know how much they will be able to pay once they get a deal on their car, or when they will be able to buy it.
But they are trying to maintain a good attitude.
"We've been through a lot worse," Ruth Steinberg said.
"I'm most upset about the Yankees."
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All-time highs for car prices
Prices for cars - new and used - soared on strong demand and tight inventories this summer, caused by shortages of computer chips and other replacement parts, limiting production.
The shortage was exacerbated by car rental companies that sold about a third of their fleets during the first months of the pandemic, when travel came to a nearly complete halt.
These companies are often a major source of used car supply.
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High car prices have been a major factor behind the overall rise in the cost of living, as measured by the consumer price index, the country's key indicator of inflation.
Car prices may have peaked - Tuesday's CPI report for August showed that used car prices fell by 1.5% from July, although they were up 32% from a year earlier. - while new car prices increased by only 1.2%, the slowest rate of increase since April.
Other measures of car prices had also shown that prices peaked in late summer.
But that trend probably won't continue after Ida.
"Excuse the pun, but it's the perfect storm. There's never been something like this before," said David Paris, senior manager of market knowledge at JD Power.
"We definitely see used car prices going up for two to three months after a storm. But that's when there is a healthy level of inventory. This is uncharted territory."
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Why do floods destroy cars?
Major storms can affect car prices across the country for many months, because many cars are lost simultaneously.
"A car that's been through a flood is basically rotting from the inside out," said Patrick Olsen, executive editor of CarFax, which tracks damage to cars.
"Any time there is mud or sediment in the connections, it can create a short circuit in the system, which can cause a car to stall while driving."
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Hurricane Harvey, which impacted the Houston area in late August 2017, is believed to be the most destructive in terms of severely damaged or destroyed vehicles.
Cox Automotive estimates that as many as 500,000 vehicles in Texas were lost to that storm, compared to 250,000 that were lost to Superstorm Sandy in 2012 and 200,000 to Hurricane Katrina in 2005.
Hurricane Harvey raised wholesale prices for used cars nationwide by about 3% during the month after the hurricane, and prices remained high through November.
Experts fear it will be worse this time, even if fewer cars are affected.
"This is a historically small market, so there is going to be a much higher impact than we saw in previous storms like Harvey," said Reynolds of Cox Automotive.
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CarFax estimates that at least 212,000 vehicles were lost in the storm.
And AIR Worldwide, which estimates the insurance industry's losses from natural disasters, believes insurers will cover the losses of more than 250,000 vehicles during Ida.
And only about 78% of vehicles will be insured for this type of loss, according to the Insurance Information Institute, which means that the number of lost vehicles will be even higher than the insured claims.
Anyone looking to buy cars in the coming months, even those far from hurricane routes this year, should be careful: CarFax estimates there are 370,000 storm-damaged cars on the road today, often sold to buyers. unprepared.
Some of those cars were damaged by previous storms, including Hurricane Katrina 16 years ago.
"If you see a price that is too good to be true, it is probably too good to be true for some reason," said Paris of JD Power.
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