Almost two years into the pandemic, we have almost become accustomed to the insane car market. While there have been some improvements to the manufacturing constraints and more cars are reaching the dealerships, the situation is still far from normal. Taking into consideration the average new car cost, which is a reliable way to compare the market prices from just a year ago, the new car price currently stands at $47,077 as of December 2021. Compare that to $40,000 in the summer of 2021 and we can begin to see the extent of the damage.
Whether you’re looking for a new family SUV or a used Dodge Challenger for sale to have some fun, expect to pay a significant markup if you can even find a good example.
The car market as a whole has more or less adapted to the new normal, implementing different strategies like virtual showrooms, and even home delivery of new cars. But, there are no new cars, to begin with. The usual dealership with rows and rows of new cars to choose from is now left with empty lots. Customers are paying up-front before the cars even arrive at dealerships regardless of the higher prices. An estimated 4.5 million customers are currently waiting for cars, and this pent-up demand will take quite a while before it returns to normal. Because of this, 2022 will be similar to 2021 as prices will keep climbing and new cars will still be harder to attain.
Even just a few years ago, negotiating with the dealer for lower prices was the norm. But, as of today, almost 89% of car buyers are paying over the sticker price just to get their hands on a car. Since demand has outpaced supply by a considerable margin, dealers no longer have to offer discounts or incentives to sell cars quickly. According to J.D.Power, almost 57% of cars arriving at dealerships are sold within 10 days, and the average time for a car to be sold now stands at just 17 days, compared to 49 days just a year ago. The situation has got so bad that even the President, Joe Biden, has acknowledged it and his administration is working on removing the bottlenecks to normalize the car market with better infrastructure and domestic production.
However, there is a silver lining for the whole process, especially if you have a car you’re planning on trading in. The pent-up demand has spilled over to the used car market, leading to the highest prices the market has ever seen. Cars that used to be valued at $10,000 just a few years ago are now sold for 15 or even 20 grand depending on the make and model. So, trading in your current car for a new one will reduce the initial sticker shock by a considerable amount. Even if you’re not trading it in and you have a car that you don’t use as much anymore, now is the perfect time to sell it and make a hefty profit. Even old and beat-up cars are fetching higher prices than usual, and the situation could last a while. So, unless you need a car as soon as possible, it’s a good idea to wait out the market till it goes back to normal, however, it’s not expected to happen in 2022.
At this point, you probably know the reasons that led up to the high markups and unavailability of cars. The root cause is still the pandemic, but just as a refresher, let’s recall some of the main issues that snowballed over the past couple of years to reach the current situation.
Supply-chain problems – As Covid-19 began to lock down the whole country, the supply of essential components required for the manufacture and supply of cars were disrupted. From locked ports to raw material depletion, car manufacturers couldn’t keep manufacturing cars at a normal rate anymore. Some big manufacturers like Ford, GM, and FCA (now STELLANTIS) used their resources to produce Covid-19 medical devices, while several others stopped production entirely. To protect their cash flow, suppliers started to reduce their dependence on car manufacturing. Not only the car industry, but supply chain problems have affected several other industries like the hotel and restaurant sectors. To keep up with demand, manufacturers had to find alternate supply sources, relying on other countries for parts.
Chip shortages – Because of all the modern technologies found in modern cars like the infotainment system to the advanced driver assistance systems, a lot of computers and microchips are required to run them all. Even the basics like the engine and electronics have their separate modules to ensure proper functioning. But, as the factories started to shut down and car production hit a slump at the start of the pandemic, car manufacturers who are mostly used to a steady supply of components, suddenly started to reduce their reliance on them. This led to chip manufacturers diverting their attention to electronics, supplying chips for smartphones, laptops, and other electronics.
However, as car manufacturing began to ramp up once again, and the factories started reopening, the industry started struggling because there were no chips around for the computers. On average, most cars have around 100 chips in them. Depending on the features on offer, that number can go up to 150 or even 200. With such a high requirement for computers, car manufacturing was severely affected. The shortage affected manufacturers so badly that some started producing cars and kept them aside while they wait for chips to finish the process. Chip shortages were also affected by delays at the ports, preventing the arrival of new components required for manufacturing.
Lockdowns – Factory lockdowns at the start of the pandemic are also another major reason for the limited production of new cars. To prevent the spread of Covid, all the manufacturers were forced to shut down their plants. While it was predicted that the lockdowns would limit sales to balance it out, people suddenly started preferring personal transport to avoid the virus, leading to more cars moving off the lots. Without the factories to make them, lockdowns were one of the main reasons for the initial reduction in supply.
Higher-profit models – A lot of manufacturers started to divert all their resources for their expensive models, leading to higher profits. Since consumers pay a lot more for these options, higher profit models were given priority over standard offerings. This eventually led to fewer cars produced than usual, snowballing the effect of new and used car prices.