Car Prices Expected to Remain High in 2022

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KEY POINTS

  • Used car prices have decreased for three consecutive months to $27,246, but are still at a historical high.
  • The global shortage of microchips and inventory constraints will continue to impact the availability of cars.
  • Despite higher interest rates and high gas prices, pent-up demand remains strong, especially for cars under $10,000.

Used car prices have dipped, but the car shortage will continue to impact prices.

Auto executives recently gathered at the New York International Auto Show. While some automakers were optimistic that the microchip shortage may improve, the overall consensus is that inventory constraints would continue to impact the availability of both new and used cars. 

According to Kelley Blue Book (KBB), the average used car sold for $27,246. This is down nearly $1,000 from December’s peak. While used car prices have dropped for three consecutive months, prices are still at a historical high -- 14.1% higher than in April 2021. Supply constraints and pent-up demand are expected to keep car prices high for at least the rest of the year. 

Shortage of microchips still impacting market

Used car prices hit an all-time high of $28,205 in December 2021, 42% higher than December 2019, right before the pandemic. Prices skyrocketed due to a combination of supply chain issues, high demand, and a worldwide shortage of semiconductor chips. Also known as a microchip, they act as the brain for modern vehicles. New vehicles require about 40% more microchips than cars made before the pandemic. The average new vehicle requires 298 computer chips. 

Auto companies anticipated that car sales would drop when the global pandemic began in March 2020. As a result they slashed microchip orders leading microchip manufacturers to reduce chip output. The global economy, however, bounced back faster than expected, with people buying more chip-heavy electronics. 

There are only a few microchip manufacturers worldwide, and even with all of them operating at full capacity, experts predict the microchip shortage will continue to last until 2023. This is due to the backlog of consumer demand, low inventory, and low factory output.

Pent-up demand

In March, there were 1.2 million new cars on dealership lots. This is about 50% less from a year earlier and one-third of pre-pandemic norms. The lack of vehicles means car buyers are having to often wait weeks or even months for a car. Cars that are not pre-ordered are arriving at dealerships pre-sold as consumers look to snatch up cars quickly. Even with the increase in interest rates, experts believe pent-up demand for cars should last several months.

With the shortage of new cars, consumers have begun to shift their focus to purchasing used cars instead. This has driven up prices of used cars four times faster than new cars. The extended period of low inventory for both new and used cars will continue to keep car prices high. 

Cars under $10,000 are the hardest to find. Dealers only have a 26-day supply of them while they have a 37-day supply for cars priced between $10,000 and $20,000. Cars priced between $20,000 to $30,000 had a 50-day supply and cars priced over $35,000 had a 60-day supply.

What options do Americans have?

Based on your personal finances and what your needs are, it may be best to wait to purchase a vehicle until next year. J.D. Power forecasts that used-vehicle prices will drop by late 2022 and into 2023. Since it is a seller’s market, many car companies have not only raised prices, but they have sharply reduced the number of financial incentives and discounts. 

If you have to purchase a car, look at expanding your search parameters. You may have to compromise on your wishlist. One silver lining is that you may be able to get a higher price if you sell or trade-in your used vehicle. This can help offset the cost of a new car. In the first quarter of this year, buyers received an average of $9,300 for their trade-ins, 81% more than the previous year. 

While the prices for both new and used cars have at least ended their rocket ride for now, prices are expected to remain high as there are no signs of cooling consumer demand. Even with inflation hitting a 40-year high, car prices may increase as consumers begin receiving their tax refunds. The key is to stay patient, continue to do your research, and take care of your current car so it lasts longer.

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