Is Used Car Market Correcting Itself?

Persistent inflation globally has made the prices of products skyrocket to historic levels since the pandemic. According to a report by the Bureau of Labor Statistics, inflation had spiked to 8.6%, the highest in the last 20 years.

The cost of new and old cars has not been spared, and their prices have progressively spiked. In December2021, the price of used vehicles rose to $28,205, a 42% increase in costs compared to those in December 2019.

Price of Cars Progressively Shot Up due to Increased Demand

Since the pandemic, automakers have struggled to keep up with car demand. Essentially, there has been a significant shortage of semiconductor chips which has halted the production of vehicles. A decrease in the making of new cars has resorted to very low inventories and increased car prices.

Due to the shortage of new cars, most buyers started buying used cars, progressively leading to shortages and price increases. In the last year, there has been a trend where car dealers have increased their prices considerably.

Prices in Car Auctions are starting to Cool Down

Over the last few months, Chip manufacturers have increased their production capacity. Due to the availability of chips, auto manufacturers are producing enough cars, minimizing shortage and leveling the prices of vehicles.

The current Manheim value index for used cars stands at 236.3, which indicates that the spiking of used car prices is finally leveling off. However, the prices of used cars are still high compared to last year, but the stabilization indicates that the sky-highprices might be going down soon.

What is the Possible cause of Correction?

Factors such as inflation, higher interest rates, and the emergence of new cars are the main factors leading to the correction of used car prices. Ideally, high-interest rates circulating in the market discourage buyers from acquiring loans, thus minimizing the demand for used cars. In the long run, if there is less demand, there will be an increased inventory in the market, leading to lower prices.

If the inventory of used and new cars rises persistently at today's inflated prices, a correction of prices in the market will occur. Most car dealers will be forced to drop the prices of their cars so that they can make more sales.

Manheim recorded a decline in demand for used cars by 13% in April compared to March. The estimates are pretty promising, suggesting that the demand is decreasing, which is quite helpful in stabilizing future prices.

What to Expect in the Price of New Cars

The prices of new cars are expected to continue rising in the coming months. The average cost of a new vehicle in May was $46,526, which was higher than $5,354 compared to April. The decrease in microchips has primarily contributed to the increased prices.

Tesla is one brand that has spiked its prices of its electric cars. Some of the Tesla model's costs have risen by $6,000. The increase comes after the brands persistently increased their expenses every month in 2021. Inflation and slow production are the main reasons the costs of this car model are rising exponentially.

Toyota has also increased the price of its line-up by 4% since January. On the other hand, Hyundai has expanded its car costs since May 2022. Ideally, most new car dealers have increased the prices of their cars.

Key Takeaway

The prices of a used car are expected to drop in the coming months. Decreased demand for used vehicles, high-interest rates, and the emergence of new cars will contribute to the leveling of used car prices. Thus if you are planning to purchase a used car, the market might offer better prices.

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