- The pandemic caused used car prices to spike to $28,000, a 42% increase in the past two years.
- The unsustainable spike has created a used car financial bubble.
- With chip manufacturers currently catching up with demand and the Fed raising interest rates, used car prices may crash by 30%.
Used car prices have hit their peak. Could this be a bubble?
The pandemic created an unprecedented (and unsustainable) bubble where used car prices rose by 42% since December 2019. Like all bubbles, it is inevitable that prices will come crashing down. Here are three signs that the used car market crash is coming.
1. An unprecedented and unsustainable price increase
When the pandemic hit, auto makers expected car demand to plummet. As a result they reduced output, and microchip manufacturers followed suit. With the shortage of new cars, consumers began to use their stimulus checks and took advantage of low interest rates to purchase used cars instead, driving up prices four times faster than new cars.
The perfect storm of supply and demand created a temporary and unsustainable spike in used car prices. As the car market stabilizes, consumers can expect to see used-car prices drop down to normal levels.
2. Chip manufacturers catching up with demand
According to Goldman Sachs, chip manufacturers are currently catching up with demand. Auto production is expected to return to normal by mid-2022. Once automakers get the chips needed to produce a normal supply of new cars, new-car inventory will begin to stabilize.
Millions of consumers that were forced to buy used cars may go back to purchasing new cars. In addition, supply chain issues due to the pandemic are beginning to clear up, helping expand auto product capacity. This will result in a decrease in demand for used cars. As a result, J.D. Power forecasts that used-vehicle prices will drop by late 2022 and into 2023.
3. Interest rate hikes
The Federal Reserve has stated that they will raise interest rates this week to help combat inflation. Experts say the increase in interest rates could result in the automotive industry losing $22 billion in sales.
This is because car sales are extremely sensitive to interest rate changes. Higher interest rates will make it more expensive to borrow money, reducing demand for used cars. As a result, consumers may purchase 150,000 fewer new cars and 500,000 fewer used cars.
How to prepare for the crash
If you have the luxury to wait to buy a car, you should hold out until prices fall. According to Edmunds, 8 out of 10 car buyers paid above sticker price for a new car. There are close to 17 million car owners that own vastly overpriced used vehicles. More than half of these cars are financed, potentially resulting in many car owners with car loans that will be underwater.
Determine your budget when looking to buy your next car. Then take a look at your personal finances and make any necessary adjustments. Shop around for the best deal and expand your search. By widening the type of car you want and geographic area, you may get a better deal. You may also be able to leverage your current car as a potential trade-in. This can help offset the high costs.
The automobile industry suffered a series of unexpected events that resulted in a supply and demand imbalance that was unprecedented. This caused the average used car in America to rise to $28,205, 28% higher than one year prior. With the supply imbalance returning to normal and the interest rate hikes, consumers should expect to see used car prices coming back down to earth.
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