Can’t afford a new car and planning to save some bucks by investing in a used car? Not happening. At least not this year. If you’re wondering why that is the case then let us take you through a deep analysis of all the reasons why this is happening and what we can expect in the new feature.
What’s happening?
The Consumer Price Index has set new records by being the highest in the past 13 years this May. More than a quarter of this rise was solely due to a spike in the prices of used cars. There has been an increase of about 30% in used car prices in the past year which is the highest yet. The price of an average used car was about $26,500 this June, according to Edmonds which is a resource for information related to cars. This is a 27% percent rise as compared to last year. On the other hand, the average price of new cars is about $41,000 which has risen 5% in the past year.
What is causing this steep rise in used car prices?
A lot of factors are in play for causing this massive jump in used car prices. Prices of used cars are closely linked to the market for brand new ones. When the pandemic caused the entire world to come to a halt, it also had a devastating impact on the production of cars.
What was the reason for the delayed production of new cars? An overwhelming shortage of microchips – a critical component required in car production. This caused a choke in the supply of brand-new cars which drove the car prices skyward. This was mainly due to a huge difference between supply and demand.
Now, this reduction in the production of new cars caused many buyers to look towards used cars which chipped away used-car inventories. This brought many new customers to the market for used cars. Reduction in the assembly of new cars has upended the flow of new models to and from most rental agencies. Rental agencies usually buy up to 2 million new models every year and sell them 2 years later. Rental agencies sold a huge number of cars during the pandemic because not many people were traveling in fear of catching COVID. However, as the pandemic nears its end (hopefully), things are getting back to normal and people are traveling again. Therefore, travel agencies are resorting to buying used cars in bulk and the spike in demand has added to their worth and hence caused a sharp increase in their rates.
New models are not available in large numbers and the models which are available are worth way too much. For this reason, people are not selling their old cars very easily because they cannot afford a new one. This further reduces the flow of used cars into the market, leading to a reduction in supply.
What can we expect in the near future?
The market for new and used cars seems to be choked at the moment but we believe that it will surely get better with time. This is because prices seem to have touched the sky and now the only way forward is down. This is because economies work at curves and prices can’t keep going higher forever. We also have a proof for our claims. Wholesale car prices declined between May and June for the very first time since December 2020. This suggests that there is some hope for the future and we can expect the supply and demand to reach some sort of equilibrium in the future.
Experts believe that retail prices of cars may also follow suit and consumers will soon see a fall in the prices of vehicles. As the pandemic-induced car-buying frenzy subsides and things normalize, we hope to see car prices returning to normal as well. The pandemic might be subsiding but the shortage of microchips may not go away anytime soon. Experts have predicted that this shortage might even get worse in the second half of this year. This means that you will not be able to see a reduction in used-car prices very soon. It might take a year or even two before the development and manufacture of new models normalizes. Even after the development of new cars returns to normal, it will take a long while for the used-car market to return to normal.
Final verdict
We hope that now you have a better idea about why there has been such an increase in car prices in the past year and what factors have contributed to this increase. If you’re planning on buying a car, new or old, you might have to rethink your choices and make sure that it is absolutely necessary. Waiting a year or two might still be a wise choice. However, experts believe that the used cars available in the market today are of very high quality. This means that even if you’re paying a lot, you can find solace in the fact that the car will last you many years. This makes it a good investment.
