By Guerino Tondreau
August 10, 2021
For the better part of 2021, the demand for pre-owned vehicles has seen a steady rise. Large luxury suvs and trucks between two and five years old have quickly become the most sought-after vehicles on the market. Due to the demand for these vehicles, there has been a corresponding massive increase in price for all types of cars. This increase in price is not typical of the behavior of this market sector. It is reported that a worldwide chip shortage is one of the leading causes of the unanticipated rise in the price of used vehicles. Inflation has also played a slight role in the historic price increases. Scarcity in the production of new cars is another factor which has contributed to this phenomenon. Hence, the used car market is also currently inundated with buyers from all tax brackets. This influx of buyers creates an environment for sellers to inflate their prices, well beyond their normal boundaries.
A look into their rise in price:
The largest jump in prices occurred from May to June. The consumer price index stated that price rose by approximately 1%. This was one of the largest changes to occur in the last decade. In comparison to the year prior this was a 5.4% increase from one year to the next. Used cars sale made up for a little more than 33% percent of this change.
As stated earlier, there is currently a massive shortage in semiconductor chips. Between the months of February and April, the production of new cars in the United States was down by approximately 15% from previous years. This downward trend in the manufacturing of new cars continued until it ballooned to over a 50% decrease compared to the previous year. New car prices soared by about 18% from April to June. The semiconductor chips are basically the brains of modern vehicles. They control a number of different functions of our cars, this includes things like our infotainment systems.
Due to this shortage, we have seen an immense decline in new car production and stock here in the United States. Rental car agencies suffered greatly during the lockdown stage of the pandemic. The ban on travelling and other restrictions such as the stay-at-home orders had a profound negative impact on this sector of the market. The demand for rental cars was drastically reduced because fewer people were on the road. This forced many of them to sell off large parts of their inventory just to stay afloat. However, as lockdowns across the country eased up, people began to show interest in travelling again. This in turn contributed to an increase in the demand for pre-owned cars. Rental car businesses decided to increase their inventory by purchasing used vehicles. They have played a critical role in inflating the demand and cost of used cars in the United States.
The pre-owned car market has also been impacted by the decline in the production and supply of new vehicles. Fewer people are willing to let go of their cars for another used one, due to the higher prices. They prefer to retain and maintain their vehicles. From a financial perspective, it makes more sense to keep one’s car. The inflated price of new cars is a deterrent to most potential buyers. The car industry has not been able to meet the increased demand for new and used cars. In response to this, private sellers along with car dealerships have created an environment where buyers engage in a bidding war for cars.
Does the type of Car have an impact on its resale value?
The evidence shows that there have been instances where a used car costs more than a new one with the same make and model. For instance, the asking price for a pre-owned Mercedes Benz G-class SUV is $190,000. Whereas, a new one will only cost a buyer approximately $180,000. This is not typical for used cars to cost more than newer ones. One would expect this if the used car were considered an antique or limited editions.
Large luxury SUVs and trucks have seen a higher demand in the used car market. It must be reiterated that these are not antique vehicles. Instead, they are oftentimes cars that were sold on three-to-five-year leases, or it could also be cars that dealerships reached out to their customers to reacquire vehicles at a premium.
Tesla, a well-known electric car manufacturer, has been offering above market value for trade-ins of their older model cars. Evidence of this can be found on various social media platforms such as Twitter. For example, Tesla has publicized their willingness to give their customers a larger credit towards the purchase of a new vehicle from them through their app. This is one of the strategies that dealerships and carmakers alike have been using to attract buyers for their newer vehicles. However, these approaches have also caused used car prices to skyrocket over this past year, entice private sellers look to flip their vehicles on their own.
Conclusion:
The Covid-19 pandemic has profoundly affected the United States economy in many different ways. It has forced many businesses across multiple sectors to close their doors. A severe shortage in semiconductor chips has negatively affected the production and inventory of new cars. This in turn caused inflated new car prices. The increased the demand for used cars followed. As a result of this vicious cycle, the asking price for used cars also proliferated. Mushroomed prices have created an unfair advantage for used cars sellers where they can arbitrarily inflate their prices. The buyers are unable to compete and negotiate with the sellers in this current unfair market environment. They must now overpay to purchase the vehicle of their liking. As the old adage goes, “they are being taken to the cleaners”.
Sources:
Horsley, S. (2021, July 13). Inflation is still high. used car prices could help explain what happens next. NPR. https://www.npr.org/2021/07/13/1014697915/inflation-is-still-high-used-car-prices-could-help-explain-what-happens-next.
iSeeCars, iS. C., & Wire, N. M. (2021, May 30). Best cars to sell, worst cars to buy as the chip shortage sends prices soaring. WANE 15. https://www.wane.com/top-stories/best-cars-to-sell-worst-cars-to-buy-as-the-chip-shortage-sends-prices-soaring/.
Levin, T. (2021, July 12). Why used cars are so expensive now – and when prices may drop. Business Insider. https://www.businessinsider.com/why-are-used-cars-so-expensive-now-shortages-pandemic-rentals-2021-7.
Preston, B. (2021, July 13). How to navigate surging used-car prices. Consumer Reports. https://www.consumerreports.org/buying-a-car/when-to-buy-a-used-car/.
Travers , J. 2021, Meier , F. 2021, Wiesenfelder , J. 2021, Bragman, A., Normile, B., & Mike Hanley, M. (2021, May 4). Now is a good time to sell your extra Used Car; Here’s Why: News. Cars.com. https://www.cars.com/articles/now-is-a-good-time-to-sell-your-extra-used-car-heres-why-435424/.