Used car prices have peaked. Could it be a bubble?
- The pandemic has sent used car prices soaring to $28,000, a 42% increase over the past two years.
- The unsustainable spike has created a used-car financial bubble.
- As chipmakers currently catch up with demand and the Fed raises interest rates, used car prices could fall by 30%.
The pandemic has created an unprecedented (and unsustainable) bubble where used car prices have risen 42% since December 2019. Like all bubbles, it is inevitable that prices will collapse. Here are three signs that the used car market crash is approaching.
1. Unprecedented and unsustainable price increases
When the pandemic hit, automakers expected demand for cars to plummet. As a result, they reduced production, and microchip makers followed suit. With the shortage of new cars, consumers began to use their stimulus checks and took advantage of low interest rates to buy used cars instead, driving up prices four times faster than new cars.
The perfect supply and demand storm has created a temporary and unsustainable spike in used car prices. As the auto market stabilizes, consumers can expect to see used car prices return to normal levels.
2. Chipmakers are catching up with demand
According to Goldman Sachs, chipmakers are currently catching up with demand. Automotive production is expected to return to normal by mid-2022. Once automakers obtain the chips needed to produce a normal supply of new cars, new car inventories will begin to stabilize.
Millions of consumers who were forced to buy used cars could go back to buying new cars. In addition, supply chain issues due to the pandemic are beginning to dissipate, helping to increase capacity in automotive products. This will result in lower demand for used cars. As a result, JD Power expects used vehicle prices to fall by the end of 2022 and into 2023.
3. Rising interest rates
The Federal Reserve said it would raise interest rates this week to help fight inflation. Experts say rising interest rates could result in $22 billion in lost sales for the auto industry.
Indeed, car sales are extremely sensitive to changes in interest rates. Higher interest rates will make it more expensive to borrow money, reducing the demand for used cars. As a result, consumers could buy 150,000 fewer new cars and 500,000 fewer used cars.
How to prepare for the accident
If you have the luxury of waiting to buy a car, you should wait for prices to drop. According to Edmunds, 8 out of 10 car buyers have paid more than the list price for a new car. There are nearly 17 million car owners who own very expensive used vehicles. More than half of those cars are financed, which could result in many car owners with auto loans going underwater.
Figure out your budget when looking to buy your next car. Then review your personal finances and make any necessary adjustments. Find the best deal and expand your search. By expanding the type of car you want and the geographic area, you can get a better deal. You may also be able to use your current car as a potential trade-in. This can help offset the high costs.
The automotive industry has suffered a series of unexpected events that have resulted in an unprecedented supply and demand imbalance. That pushed the average used car in America up to $28,205, 28% higher than a year ago. With the supply imbalance returning to normal and interest rates rising, consumers should expect to see used car prices come down to earth.
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