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Continued Pain at the Used-Car Lot

You’ve heard, no doubt, about the pain at the pump, as gas prices continue to rise. But how about the pain of a used car lot, as prices for used cars have skyrocketed over the last two years? If you have tried to buy a car over this time frame, you have been met with low inventory, higher prices, and the proverbial sticker shock. Used car prices, especially, have put a choke hold on many consumers who are just trying to find a way to get around.

Pandemic-Fueled Upsurge in Used Car Prices

This past year has been a banner year in the price spike for used cars. And not in a positive way. “Used-car prices rose 40.5% in January from a year ago,” according to data released recently by the Labor Department. This jump also fueled inflation to an annual rate of 7.5% last month, which is a new four-decade high.

The trouble all started because there were no new cars on the lot. When the pandemic halted car production across the globe, the results were disheartening. No longer were people able to haggle on the lot and drive a car home the same day. Add to that the computer-chip shortage that forced some car plants to stop production over the past year, and the problem intensified. Though the plant problems and the chip problems are currently more stable, and automobile plants are trying to resume normal levels of output, dealers still don’t have a lot of cars on their lots to sell.

How did this happen? “In April 2020, the U.S. saw auto production drop 99% from February 2020 levels, according to U.S. Bureau of Economic Analysis data. By the summer of 2020, the automotive industry did begin to rebound, but that was short-lived: Component shortages and delays—caused by a disrupted global supply chain—caused monthly U.S. auto production to fall again. In total, U.S. car production fell 23% in 2020, and it’s currently on pace to fall another 8% this year.”

CNN reports that about 40% of US households buy a car every year. With this many people looking for a car, the disruptions to the supply chain are affecting numerous families. And because these inventory problems were exacerbated by a lack of computer-chips which extended the timeline even further, consumers turned to used cars. Astoundingly, those cars which usually depreciate are rising in value.

“You see nutty things. Cars that were $25,000 new three years ago are $25,000 today,” said Adam Lee, chairman of Lee Auto Malls in Maine. “It doesn’t make any sense.”

Normally, a brand-new car depreciates in value as soon as you drive it off the lot. But the auto world has turned upside down “For instance, the average price paid for a new 2021 model-year vehicle in April was $38,585, according to J.D. Power. In January 2022–nine months later–that same model year vehicle was selling for an average of $48, 765 as a slightly used vehicle.”

By trying to solve the problem caused by the lack of new cars, “Many new-vehicle shoppers turned to the used market for a better selection or respite from the higher new car prices. But this, in turn, caused its own shortage and record-high prices. Edmunds analysts predict that in the coming year, the average used vehicle price will surpass the $30,000 mark for the first time. Prices for 1-to-3-year-old vehicles will also often approach or exceed the price of what they would cost brand-new.”

The average transaction price for a new car was $46,426 in December 2021, according to Edmunds, up $5,850 — or 14% — from a year prior.

Rose Colored Windshields

For those looking to buy a used car, the news is still questionable for when the situation might improve. Although automakers are hopeful, expecting supply chain issues to improve, the logjam cannot recover overnight. But there is a general sense of hope that used car sales are on an upward trajectory.

“From everything we are looking at, once production is back online in the latter half of the year, we should see inventories start to build again,” said David Paris, senior manager of market insights at J.D. Power.

For example, J.D. Power forecasts that the average wholesale price of used cars should fall about 9% from the fourth quarter of last year to the fourth quarter of this year, and that prices should continue to decline in 2023. These prices, although lower, will still not touch the 2019 prices.

“Prices will be going down, but they’re not going to get to 2019 levels,” Paris said.

Jonathan Smoke, chief economist at Cox Automotive, asserts that the decline in prices for used cars will be slight compared to the giant hike in 2021. “History tells us that a decline of more than 10% is rare indeed. Why? As prices fall, demand builds,” he said. “In 25 years, we have never seen a decline of as much as 13% within a year.”

As for the supply of new cars, “inventory levels should improve but remain historically tight,” Smoke said. But the supply chain issues will not clear up overnight.

“It’s a shortage of individual components, which is caused by a shortage of semiconductors, shortages of labor, allocation of steel and resin…There’s lots of disruption,” Dan Hearsch, a managing director in the automotive and industrial practice at AlixPartners said. Not to mention, transportation and shipping issues and delays at ports, he suggests, “are the biggest weak spot at this point.”

Semiconductor production in Asia still needs to catch up, and with the unrest in the world this might take more time than anticipated. As it is, the chip shortage could stretch into 2023.

If the pandemic has taught us anything, it is to expect the unexpected. Although the supply chain is starting to even out and the used car crunch is beginning to loosen, this will be anything but a quick fix. You may be driving your current car longer than you anticipated, or you might be paying more than you want to for a new-to-you car!

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