Over a year since the Covid-19 pandemic began, the car market is still reeling from its impact. From semiconductor shortages to factory shutdowns, a lot of factors have led to the current scenario. Adding to the flames is the sudden demand for personal transport, as more and more people are avoiding public transport because of the pandemic.
The shortage of new cars because of high demand has directly affected the used car market, skyrocketing prices across the country. Cars from all segments including luxury SUVs to popular compact cars like the Honda Civic have been affected by the price rise. Several websites like CarHP will provide plenty of info on prices that have been fluctuating drastically in recent months. Surprisingly, some models cost more than showroom fresh examples.
Because of this newfound value, cars have become an appreciating asset, which is usually not the case.
The underlying cause of all this is the sudden demand for personal transportation and the shortage of new cars. Most dealers are running out of inventory a lot quicker than usual, and on average, new car inventory has been cut down by half compared to pre-pandemic levels. As long as this demand exists, we can expect used car prices to keep on rising.
The shortage of inventory is also affecting the dealers, as they have to work harder to procure cars and sell them at a lesser profit margin, with many of them trying hard to break even. While retail prices don't fluctuate as much, wholesale prices are rising significantly, reducing their share of profits. Bigger dealers who sell thousands of cars can make up for the difference by selling a lot more cars, but the smaller dealers are finding it hard to profit off their businesses.
Dealers like CarMax have shifted almost half a million cars in the first quarter of 2021, which is a significant increase over last year's sales. To keep up with demand, they have also purchased more than twice the number of cars compared to 2020. A lot of dealers have also started shopping out of state to find more cars, and statistics show that dealers who're buying cars away from their locality have doubled over the past year.
However, with such a high demand for used cars, now might be the perfect time to sell off your car if you don't use it as often. Even more popular models are fetching very high prices on the used car market. Most popular are midsize family SUVs like the Kia Telluride, which sell for more than 8% compared to their showroom prices. Prices for luxury cars have also increased, with SUVs like the Mercedes-Benz G-Class selling for a higher price than new ones.
Like SUVs, trucks are also in high demand and show a similar increase in prices compared to a new example, most notable of which are trucks like the Toyota Tacoma, GMC Sierra, and more.
Because of the government's stimulus money, most people are also able to pay off their cars, leading to fewer repossessed cars going to used car dealers, limiting supply even further. Because used cars are a lot more affordable, a lot of the stimulus money will also go towards used cars than new ones, with a lot of people going the leasing route.
If we let numbers do the talking, used car prices have gone up by a staggering 10.5% in June, the highest recorded in recent history, rising from 7.3% in May. The increase in prices has also raised the cost of living significantly.
Recounting the first 6 months of 2021, prices have gone up by 32%! Which is in stark contrast to the average depreciation of 0.6% before the pandemic began.
According to KBB, the average price for new cars is also rising, standing at $39,833 in 2021, 7.9% higher than in 2019.
Since modern cars are very complex, to begin with, requiring a lot of computers and chips to run the whole system, the worldwide semiconductor shortage has also had a significant impact on car production.
When the pandemic began, a lot of rental companies shut shop because of low returns, decreasing overall demand for new cars. Because of this, most manufacturers scaled down production. However, since the pandemic didn't subside after a few months, the sudden rise in demand for personal transportation made car manufacturers ramp up production once again, which is when the semiconductor shortage hit, severely limiting the production of new cars.
Adding to the issue were rental companies starting back up again because of the sudden rise in vehicle leases, adding to the overall demand in 2021. Americans have also started to lease more vehicles, forcing many companies to rely on the used car market to satisfy their requirements.
According to the latest Manheim data, wholesale prices have peaked recently and are expected to rise again by the end of summer. However, several indications show that the numbers have started to decline, but will take a long time to reach pre-pandemic levels.
As expected, because of the high prices, used car sales have gone down significantly in 2021, and if the trend continues, the market will balance itself out over time. If you are considering a used car, try going for less popular models to get better deals. During these times, leasing a car is also a good option, giving you personal transport at least until the market balances out. Dealers are also willing to pay extra if you decide to trade in your car in the current situation.
High prices in the used car market also affected America's consumer price index, which saw a rise of 5.4% compared to 2020. Inflation also stands at 5%, the highest in recent years.
Since the market has started to balance out, several economists are predicting that consumer prices will start to fade as the bottlenecks are removed, increasing new car production, which will, in turn, reduce used car prices to nominal levels. Because car manufacturing still hasn't caught up to pre-pandemic levels, we can expect used car prices to remain high for a while longer, making it harder to find a good deal on a used car.