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The average used car in America currently costs $28,205, 28% more than one year prior and 42% more than in December 2019. But used cars aren’t the only items that have dramatically increased in price. Inflation is up by 7.9% in the last 12 months, the highest increase in 40 years. Just as used car prices have spiked in an unprecedented manner, Americans should be prepared for used car prices to drop by 30% from where they are today.
Why used car prices are so high
The price of used cars have spiked considerably due to a worldwide shortage of semiconductor chips. In response to the pandemic, microchip manufacturers reduced chip output. But then the global economy bounced back faster than expected, and many Americans used pandemic relief programs to purchase new cars. This helped create a massive shortage of chips.
With only a few microchip manufacturers worldwide, supply was unable to keep up with demand. According to Goldman Sachs, the average new vehicle requires 298 computer chips, which is 40% more than cars made before the pandemic. With car manufacturers unable to acquire enough microchips, new car production stalled and used car prices shot up.
Why used car prices could drop
Chip manufacturers are currently catching up with demand, supply issues stemming from the pandemic are clearing up, and auto manufacturers are shifting to produce enough new cars to fill the deficit.
This normalization of the car market, combined with interest rate hikes coming down the pipeline, could result in a 30% drop in used car prices, according to KPMG. Higher interest rates could make it more expensive to borrow money, reducing demand for used cars.
According to KPMG, by the time the car shortage ends, $1 trillion worth of both new and used cars could be financed far above pre-pandemic prices. People overpaying for used cars right now may see themselves underwater on their auto loans.
How to prepare for a drop in used car prices
It is a good time to be a seller, not a good time to be a buyer. High costs across all necessities are squeezing family budgets. A budgeting app may help you minimize the impact of inflation and find other ways to save. Check your personal finances and create a plan to keep your expenses low.
The perfect storm of supply and demand created a temporary and unsustainable spike in used car prices. Like any financial bubble, what goes up, must come down. When it bursts, car owners may owe more than what the car is worth. If you're looking to buy another car, focus on taking care of your current car until car prices are more reasonable.
The best strategy is to not panic. Make sure to buy a car you can really afford, and keep in mind that cars depreciate over time. If you need to buy a car now, look at purchasing the cheapest car as a bridge for the car you want until car prices go down later this year.
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