Whether new or old, buying a new car used to be a moderately stressful activity. But now, it has become a nightmare. It just keeps getting worse. New cars have become incredibly scarce and expensive. Competition among buyers is fierce because car prices are going up. Car prices have inflated within the past twelve months that even used cars now cost up to 30% more than they used to.
Why New Car Prices Are Going Up
The coronavirus pandemic is considered the main reason car prices are going up. The pandemic disrupted supply chains of car components and computer chips, thereby throwing the auto industry into a complete mess. Since the start of lockdown in most countries in March 2020, the amount of new cars available for purchase in the U.S. has plummeted by 75%. This has resulted in scarcity, and eventually, an increase in the price of vehicles.
Shortage of computer chips initially caused by the coronavirus pandemic is also one of the reasons why car prices are going up. This shortage has forced automakers to produce far fewer cars than they used to. Manufacturers have cut down millions of production units simply because they do not have the necessary chips to produce them. And, an average modern vehicle can require thousands of these chips. The shortage of these chips forced automakers to slash chip orders and cut down on production early on in the pandemic. However, the demand for cars roared back faster than expected. People kept buying cars anyways, and all this was happening while the coronavirus outbreak was knocking the chips and auto industry off track.
Manufacturers need a lot of these chips to produce cars, but the pandemic is disrupting supply. This means that manufacturers are not producing enough cars to satisfy consumer needs, so car prices steadily increase due to high demand and limited supply. Also, the low production of vehicles means that manufacturers do not have to offer discounts or do any promotions to keep sales moving. As a result, they found out that the buyers were ready to pay an even higher amount to buy new cars when the only other option was not to buy a new car. As a result, car prices are going up because, despite lower production capacity, carmakers are making huge profits as they can now charge more for each unit they produce.
However, economists project that the chip and auto industry crisis will not resolve until at least 2023. And even if automakers resume production fully, it will still take some time for things to get back to normal in the industry.
Why Used Car Prices Are Going Up
Limited supply and inflated prices of new cars forced buyers to storm the used cars market, increasing the price of new vehicles. As a result, an average five-year-old vehicle that cost $18,469 before the pandemic went as high as $24,495 in September 2020.
Used car prices have gone up for several reasons, but they all come down to two main factors. The two main factors that have made the price of used cars go up are high demand and limited supply. First, due to the lack of new car inventory, customers who would typically go for new cars started to look at used cars since used cars were the only other option. This led to an incredibly increased demand and, subsequently, a shortage of used cars.
Used car prices have gone up because car rental companies were facing a near halt in demand in 2020, making them sell off about one-third of their vehicles to raise enough money to survive the pandemic. After selling them off, the companies are now facing a shortage of cars to rent out due to the current rebound in travel. So they wouldn’t sell what they have even as demand for them has risen.
Also, millions of people were working from home during the pandemic. After the lockdown, they are now returning to the office, feeding the already bloated need for cars.
Another reason why used car prices have gone up steadily is that many buyers who planned to purchase cars last year but delayed due to the uncertainty of the pandemic are now out there in the car market making purchases. According to J.D. Power, new car sales to Americans went as high as a record-setting 7 million vehicles in the first half of 2021. If you look at the time the purchases went up, it was just when the lockdown was lifted, allowing workers to now return to their offices.
What to Expect
Prices of both new and used cars have been going up steadily for over a year because the coronavirus pandemic has disrupted supply chains and caused a shortage in computer chips and other critical auto components. According to the United States Bureau of Labor Statistics’ Consumer Price Index, used car prices have gone up about 40% since March 2020. This was caused by an increase in the prices of new cars. Car prices are still going up steadily. The purchase price of average cars is inching up 100 to 200 dollars a week.
The decrease in the production of cars is worse than it appears. The auto market is losing cars to accidents and life cycles. The phenomenon “car scrappage” combined with decreased production has reduced the number of cars available between 2020 and 2021. And things are expected to get worse if supply chains do not normalize.
Another thing to expect as car prices are going up is inflation. Car prices are an essential part of inflation. However, economists believe that it is just a temporary spike and that prices of cars will start to decline early next year.
However, a chief economist at Cox Automotive, Jonathan Smoke, has forecasted that car prices will continue to go up through the first half of 2022 but will go down a little in the second half.
From the look of things, car prices will normalize only when production normalizes. Otherwise, car value will keep going up.
