The State of the Car Market And What to Expect Next
If you’ve paid any attention to the car market over the last few years, you know that prices of both used and new cars have gone through the roof.
In this article, we’ll go over why that is and what you can expect from the car market moving forward. Is it forever changed, or is there a silver lining on the horizon?
Let’s find out!
Car prices soared during the pandemic
First, it’s important to understand just how much car prices increased during the pandemic.
According to the Consumer Price Index Summary put out by the U.S. Bureau of Labor Statistics (BLS), consumers paid 12.2% more for new vehicles in January 2022 than they did the year earlier.
By June 2022, the average price paid for new vehicles hit an all-time high of $48,043!
As for used vehicles, prices increased by a dizzying 43% in June 2022 compared to a year earlier, leading consumers to pay a projected $10,046 more than they would have without the interruption of COVID-19.
According to Tiger Okeley at Oak Motors, “Used car prices have gone up ever since Covid because dealership costs to acquire vehicles went up. Our car acquisition costs increased nearly two-fold.”
To say the least, the rapid increase in car prices has been extraordinary—and incredibly discouraging for those looking to buy.
What’s behind the rise in car prices?
So what exactly is behind the high prices of cars right now? A few things:
First, the COVID-19 pandemic caused a lot of car supply chain issues. For example, it interrupted the production of silicon chips and semiconductors that are responsible for controlling many cars’ engines, infotainment systems, and more. As a result, a lot of car production came to a halt, or at least slowed down significantly.
Another disruption to the car supply chain that coincided with the pandemic was the war in Ukraine, which especially impacted the production of European vehicles. For example, Volkswagen, BMW, and Porsche rely on car parts assembled in Ukraine. Now they’re being forced to cut back on production.
The pandemic also had an impact on the demand for cars. For example, because air travel was heavily restricted to help prevent the spread of the virus, many people who otherwise would have traveled by plane were forced to travel by car, which put extra upward pressure on the demand for cars. Generous fiscal stimulus by the U.S. government likely also helped increase demand by putting more money in people’s pockets to buy cars.
Basically, the recent rise in car prices is a result of basic laws of supply and demand. In this case, supply fell sharply and demand went up, which always leads to higher prices.
When will car prices start coming down?
Of course, this all begs an obvious question: When will car prices start to come down again? Unfortunately, the answer isn’t so simple.
According to the Federal Reserve Bank of St. Louis (FRED), car prices peaked in September last year and have been coming down gradually ever since.
However, they are still far from where they were before the pandemic. So even if car prices continue to decline, they probably won’t reach pre-pandemic levels for a long time (if ever).
Why? Well, many of the root causes behind car price increases discussed earlier are still at work, and it will take time for their effects to dissipate.
The future of the car market
So if you’re in the market for a new car, the best advice is to be patient.
That doesn’t mean you need to wait until the car market returns to normal. After all, who knows if it ever will? It just means you’ll need to do your due diligence and shop carefully.
If you’re in the market for a new car, you’ll likely need to reserve one by getting on a waitlist.
If you’re searching for a used car, know that many used cars are coming on the market not only with higher prices but with higher than usual mileage. This means you need to take extra care to get an inspection done before you buy. You wouldn’t want to pay top dollar for a car that isn’t in good condition.
Even if you’re not in the car market, chances are you will be eventually. So it’s important to know what to expect so you can plan ahead.
