The last couple of years has been like a rollercoaster for the auto industry. From factory shutdowns to skyrocketing demand, several factors came together to create the perfect storm to disrupt the whole market. Adding to the pressure is the shift to zero-emission vehicles, which are becoming popular nowadays.
When the Covid-19 pandemic started, the whole world was caught by surprise, leading to sudden lockdowns and economic disruptions. The Auto industry was also affected by the lockdown as customers suddenly resorted to working from home, seemingly decreasing the demand for new cars. So what actually happened? How did it affect used car prices?
To get to the bottom of this situation, first, we have to understand how the used car market works. For example, say you’re looking for a used Kia Seltos for sale. Because of lockdowns, the production was suddenly halted, reducing supply. But when a sudden demand for personal transportation arose, the factories suddenly couldn’t supply enough cars because of chip shortages, limited workforce, and a lot of other factors. This caused a limited supply of Kia Seltos SUVs to the market, forcing people to shop for used examples, raising their value.
This sudden rise in demand for used cars has significantly increased their value over the course of the pandemic, rising to more than 40% compared to pre-pandemic levels. The average used car price currently stands at $25,410 as of June 2021 compared to $20,942 in 2020 and is still rising. Because of the unavailability of new cars, all customers with money to spend are resorting to the used car market, and spending just as much on used cars, driving up prices.
Because of the pandemic, it’s a fair assumption that used car prices will plummet because of the sudden decrease in demand. But, more than a year since the pandemic started, used car prices have skyrocketed, with some used models priced more than their showroom fresh counterparts. While this bubble will eventually burst as production catches up, the situation is expected to last at least till the end of 2021.
Because of pent-up demand, some popular models like the Hyundai Palisade, Kia Telluride, and more are selling at auction for more than their original sticker price. Full-size pickup trucks and even luxury models like the Mercedes-AMG G 63 are in high demand.
Diving into some of the reasons behind the sudden rise in prices, let’s take a look at how it has affected the used market:
We’ve been hearing about chip shortage for a while now, so how does it affect the auto industry? Unlike cars from just a decade ago, modern cars have become a lot more complicated, using several modules and computers to run the whole system. Because of their high reliance on microchips, whole production lines are being halted since the cars can’t run without computers and electronic management systems.
Most of the microchips used in cars are imported, and many manufacturers like Ford are shutting down their factories for months because of chip shortages. An estimated $2.5 billion in revenue was lost by Ford because of the shutdowns and limited production.
Adding to the chaos are factory lockdowns and a limited workforce at the beginning of the pandemic. Even after all the factories were reopened, chip shortages are still limiting production for more than a year since the pandemic began.
Usually, most rental companies update their fleet a couple of years, resulting in a flow of cars to the used car market and a lot of new cars replacing them. But, because of the pandemic, a lot of rental companies sold off their stock as the pandemic started. As the market reopened after lockdowns, most rental companies started re-growing their fleet. Since new cars were not available, all of them started relying on the used car market, increasing demand even further.
The issue started when manufacturers canceled their chip orders since most of them predicted low sales throughout 2020 because of the pandemic and factory shutdowns. Since most manufacturers usually adopt just-in-time manufacturing, they don’t keep a lot of components and inventory in stock, and they are bought as required depending on demand and production. But as the world slowly opened up and lockdowns were lifted, a lot of customers who were on the fence about buying a car suddenly decided to take the plunge.
Since cars are a lot safer than public transportation, most of the population suddenly preferred personal transportation. This sudden rise in demand caused production lines to start back up in full force. But, because there were no microchips, manufacturers had to order them again, severely limiting production. Not just the auto industry, the rest of the market including smartphones, personal computers, and more are experiencing the same situation.
Since there is a limited supply of new cars, customers and car rental companies are moving on to the used market, raising the demand for used cars.
This sudden change in the used car market has also led to owners keeping their current cars for longer, further reducing the supply of used cars. According to some estimates, the limited production of new cars will continue till 2022 or later, meaning the chip issues and high used car prices will continue till late 2022. So, if you’re eyeing a new or used car, it’s a good idea to keep your current one for at least 6 months or longer and wait for the market to normalize.
The weekly rise in used car prices is steadily declining, and the wholesale prices are also leveling off. But, don’t expect pre-covid prices anytime soon. The whole industry now depends on how soon the chip shortage lasts, after which, it’s business as usual for manufacturers.
Even when new car production returns to normal, the used car market will take more time to recover, as the cycle of shipments, trade-ins, and more will have to pick up again.
So, in conclusion, the used car market is surging right now because of high demand and it will take a long while to recover. If you’re planning on buying a car in the near future, retaining your current car and delaying the purchase for at least 6 months is a better option.