When Will Car Prices Come Back to Earth?

When Will Car Prices Come Back to Earth?
when will car prices come back to earth?
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  • buyers paid 12.2 percent more for new vehicles in january 2022 than in january 2021, and the picture was even worse for used vehicles, which were up more than 40 percent year over year.
  • covid-19, the resulting chip shortage, and now the russian invasion of ukraine are all parts of the problem. those may end, but expect the car-buying experience to be permanently changed.
  • if you want a car, think ahead to 2024, a date when analysts told car and driver things will be leveling off somewhat. think ahead, too, and plan to do research and then order the vehicle you want. just don't give up. cars are still just as awesome as ever, and that won't change.

    unless you've been avoiding the news feed on your phone for the past couple of months, you know the sad story about car prices: they've soared. according to the u.s. bureau of labor statistics' consumer price index summary, transaction prices—what people actually paid for their vehicle—were up by 12.2 percent for new vehicles in january compared to a year ago. prices for used cars were a dizzying 40.5 percent higher than in january of last year. new-car shopping site edmunds.com reported that 82 percent of new-car buyers in january paid over sticker for their new vehicle; a year ago, only 2.8 percent did. gulp.

    that's the bad old news. the more pressing question is: when will car prices return to earth, to the hot buyer's-market deals we saw before covid hit?

    according to top auto-industry analysts: not any time soon. we're going to be paying premium prices for both new and used vehicles for a long time to come.

    when will the chip shortage level off?

    "i don't see msrps going down," says stephanie brinley, principal analyst at ihs markit. "but i do see some of the volatility with transaction prices leveling off when we get supply closer to demand." when will automakers be able to produce enough new vehicles to begin meeting that demand? "we're talking late 2023, early 2024," predicts brinley.

    the shortage of new vehicles, as everyone knows by now, was driven by the covid-19 pandemic, which interrupted production of the silicon chips that run the multitude of onboard processors that control everything from a vehicle's engine controls to its infotainment system to its power-seat memory functions. unfortunately, carmakers are still months away from being able to get as many chips as they need to return to full production.

    "what i'm hearing from my contacts in the semiconductor industry," says sam abuelsamid, principal analyst at guidehouse insights, "is that, hopefully, by the early part of next year things will settle down." and that, brinley says, means "you're into the second half of next year" before carmakers can produce enough new vehicles so that dealers can even begin building up their inventories.

    it's a domino effect

    "most likely we've passed the peak of prices," says alex yurchenko, senior vice president and chief data science officer at industry analyst black book, which focuses its research heavily on used-car prices. where those prices are going, says yurchenko, "is a complicated question and there are a lot of nuances to it. we're already seeing declines in wholesale prices. after the next two months we expect to see retail prices coming down, together with wholesale prices. but the small print is that, yes, prices are going to be coming down, but we're starting so high that we're not going to get to the pre-covid level any time in the foreseeable future."

    analyst carlie chesbrough, senior economist at cox automotivethe company that owns both kelley blue book and autotrader—agrees that the domino effect of the chip shortage will be with us for years to come. "the repercussions of 2020 and 2021," he says, "when we sold 14.5 million and 14.9 million new vehicles when we normally were having a 17-million market, means you have almost four and a half million vehicles that were wanted that no one was able to buy. that unmet demand is now in the used-car market.

    "with pre-owned cars, they're three years behind on average because that's when you get the off-lease vehicles. so we already know the volume of [used] vehicles available on the market in in 2023 and 2024 is going to be substantially lower." and that means higher prices at least two more years out.

    big changes for dealers

    "the industry is going through a transformation," says chesbrough. "covid presented this opportunity to get lean and mean, pulling back on incentives, having dealer lots stripped bare." to offer one example, automotive news reported today on plans for ford to create a new dealership model for its evs that would involve "a commitment to carrying no inventory, selling at nonnegotiable prices, and operating with scaled-down facilities."

    according to brinley, "automakers and dealers have come to understand through [today's challenges] that a leaner inventory situation makes them more profitable. we're likely to see dealers carrying less inventory."

    big changes to the dealership model will likely mean the discounts and incentives of the past won't be coming back, says abuelsamid. "manufacturers are going to try to maintain that discipline of balancing inventory to sales demand to keep the prices up. so, i don't think we're going to get back to where we were in 2019." he means ever. yerchenko says, "for probably the next three, four, or maybe five years we're going to be in an environment where used inventory is limited. and that's going to keep the prices elevated.

    "what we can't predict for are external events," brinley points out, "and in the last three years the hits have just kept on coming." indeed, the war in ukraine is already affecting european vehicle production. according to reports in both the new york times and industry publication automotive news, volkswagen, bmw, and porsche—which rely on a supply of wiring harnesses assembled in ukraine—are already being forced to cut back on production. that will likely impact the number of vehicles those companies can export to the u.s., further limiting supplies of new cars. given the rules of supply and demand, fewer cars for sale will likely mean prices stay elevated that much longer.

    based on those assessments, it looks like new cars will be in short supply well into 2024, and the number of used cars on the market could lag behind demand at least a couple of years beyond that. in other words, it's going to be a long time before both new and used car prices come down to anywhere near pre-covid levels.

    plan to order and wait, but you can still get a car

    so, what's a car buyer to do?

    don't wait, says abuelsamid; there's no point. "what i've been telling friends and neighbors who are interested in buying a vehicle is plan ahead, give yourself a couple of months, figure out what you want, and go to a dealer and factory-order it. so that way, when that it comes in, it's allocated to you." and if you're trading in, remember that your pre-owned ride is likely worth many thousands more than it was just a short time ago, which will help to offset the increase in vehicle prices.

    "now we have to look at car buying a little bit differently," advises brinley. "understand that even though new vehicles are in tight supply, they do exist. if you're a little patient, you don't necessarily have to take whatever price is offered to you. there's another dealership down the road. there's another vehicle coming down the road. it might mean that you don't get your new vehicle in two days after you've spent 10 months researching and you're ready to buy. you might have to wait on that. be proactive as a consumer; you don't necessarily have to take the offer that's in front of you."

    for those of us who love cars new and old, this is not the news we wanted to hear. but it's time to face up to the new reality: vehicles of all types and ages are now significantly more expensive than they were before the pandemic, they are going to stay that way, and we're going to have to budget accordingly. this only reinforces our central belief that the best thing you can do when purchasing a vehicle is to buy something you love. you're going to spend a lot of time behind its steering wheel, and those miles should be as engaging and entertaining an experience as possible. now that we'll be spending more money on our cars, holding to that core tenet is more important than ever.

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