In the first 6 months of 2021, the price of used vehicles has soared by 43% and account for one-third of US CPI increased. In June, if you’d like to buy an one-year used car, it is even as expensive as a new car. It’s really hard to believe car has become appreciating assets. But why the used car market become so odd?
Before we deep dive to figuring out those reasons, we have to quickly understand the Economic 101: Supply and Demand. Generally speaking, prices have risen for various kinds of reasons, but we can all boil down to two factors: elevated supply and limited supply.
Elevated Demand of used cars
As we know, rental car companies are the major used cars supplier all the time. They would buy the new car for providing services and sell the used cars after 3–4 years. During the pandemic period, they sold off one-third of their cars in a short period of time to keep more cash at hands to survive the pandemic which leads to the used car price slashed last year. However, with more and more people taking vaccine, we can definitely see the economics activities are gradually bouncing back to previously peak level, and rental car company also sense this opportunity. Therefore, they’ve been starting to purchase a great number of new or used cars to replenish their fleets which dramatically increase the demand of used car lately. Their role change from main suppliers to main buyers.
Limited supply of used cars
Besides, we have to know the new and used car market are inextricably linked. If more new cars are sold, the more used cars would be pushed to marketplaces. During the pandemic, the new car sales plummeted by nearly 50%, so automakers all ceased or at least lowered production and halted ordering from vendors.
This year, with the demand gradually increasing, car manufacturers would like to produce more cars but bumped into the very serious chips shortage. (For your information, now more and more car components are replaced with electronics. A typical car contains more than 100 chips that power from infotainment system to transmission, so car manufacturers more rely on chips provider than ever.)
Getting chips become more difficult and the lead time would be at least 5–7 months because chips manufacturers were backlogged with the orders from different products, such as webcam, smart phone and other consumer electronics. If the chip shortage won’t be tackled, the price of new car still remains crazy.
Due to the impact of pandemic, we have elevated demand and limited supply in the car market which make the price of car soared ridiculously. Next question is how long will the price stay up? I think it really depends on how long the chips shortage will last. If you want to buy a car now, maybe it is not a good timing until next year.