When Will the Car Market Return to Normal? Maybe Never
The car market has been haywire for two years—and normal is still a long way off.
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It’s been more than two years since the coronavirus pandemic upended a relatively healthy car market. Early in the pandemic, new car sales slowed to a crawl as factories closed and dealerships shut their doors. The used car market was flooded with stock offloaded by rental-car companies scrambling to stay solvent in a travel-free economy. Two years on, the picture is wildly different, with manufacturers and consumers wondering when the car market will return to normal. Automakers can’t build cars fast enough to meet demand, and new and used car prices are posting double-digit year-over-year gains. 45% of would-be car shoppers say they’re waiting until prices go down to commit to a purchase. But they could be waiting a long time.
What Went Wrong?
Problems in the supply chain are the driving force behind car-market volatility. Parts shortages that started with a month-long strike of GM workers in 2019 expanded after the pandemic’s onset in 2020. Factories worldwide shut down in early coronavirus lockdowns, and carmakers were so worried that demand for new cars would dry up in a pandemic-shocked economy that they canceled contracts with parts suppliers, including the suppliers of the semiconductor chips that are essential to modern cars.
That turned out to be a big miscalculation. Demand for new cars quickly bounced back from a March 2020 low, but by the time automakers started planning for a brighter future, chip makers had already sold their freed-up manufacturing capacity to other customers. That meant that even when lockdowns ended and factories reopened, carmakers couldn’t source enough semiconductors to build new cars at the rate customers wanted to buy them. This new car shortage dynamic has persisted ever since, and unpredictable supply-chain disruptors like the war in Ukraine and COVID-19 outbreaks haven’t helped.
New, Used, or Leased?
The low supply of new cars paired with high demand—and, because the chip shortage is now entering its third year, that’s some very, very high demand—has allowed dealers to charge above sticker price for new cars. The average transaction price for a new car was
$45,927 in March 2022, up 12.9% compared with March 2021. Prices have risen even more sharply on the used side of the lot. Wholesale used car prices were up 25% year-over-year in March 2022, and the average transaction price for a used car between one and five years old was $34,429 in March, just $3300 less than the average price of a new car in March 2020.
Those high used car prices mean that your trade-in vehicle is an extremely valuable bargaining chip in negotiations with a dealer, especially if it’s in good condition and relatively new. And depending on your personal finances, it may make more sense to buy new than used, a reversal of the typical car-shopping wisdom. Inflated prices mean you’re not reaping the benefits of depreciation when you buy used, and that you’ll lose less to depreciation if you buy new. If you can afford it, shelling out the extra money for a new car will bring you fresh warranty coverage, higher levels of technology, and plenty of options if you decide you want to trade in your car in the near future.
The calculus for leasing has changed, too. Pre-pandemic, lease customers could count on lower monthly prices than those who financed their cars, but that situation has reversed during the chip shortage, since automakers and dealers plagued by low supply are less interested in providing the incentives that were keeping lease payments low. Those incentives could come back as the supply of new cars increases, but the return will likely be slow.
The standard mileage allowance on leases has shrunk from about 12,000 miles per year to about 10,000 during the pandemic. Lower mileage limits protect a lease car’s residual or resale value, so automakers are likely to try to maintain that change even as the rest of the market returns to normal. If you were regularly bumping up against the mileage limit in a previous lease, you may have an even harder time sticking to the rules now.
How Has the Shopping Experience Changed?
The sudden shutdowns in March 2020 forced car dealerships to quickly ramp up the infrastructure for online car sales. Most Americans still buy their cars in person, but if you’re so inclined, you can now close a deal from the comfort of your living room. The shift toward online buying also accelerated the growth of web-based used car brokers such as Carvana and Vroom, which buy and sell used cars. Carvana expects to sell around 430,000 cars this year, making it one of the largest used car dealers in the country.
The trouble automakers are having building cars means that supply at dealerships is very low, and unless you’re willing to compromise on everything from color to features to the model type you drive off in, you may have to plan significantly further ahead for your new car than you would in the past.
Some carmakers—Ford, for example—are encouraging shoppers to special-order their cars through the dealership rather than buying from inventory. It means a multi-week wait, but you’ll get exactly what you want. Automakers are also adopting reservation systems for their new-model launches, in which a small deposit buys you a place in line for a hotly anticipated new car such as the Ford EV F-150, GMC Hummer EV, or Tesla Cybertruck. This system helps carmakers gauge interest in new products and boast about presales, but it requires supreme patience from customers. Reservations are typically placed before a model enters production, so you could wait a year or more for delivery.
When Will the Market Return to Normal?
It has so far been difficult to predict when the pandemic will loosen its grip on the global supply chain. The rise in used car prices has already shown some signs of slowing, and the production of new cars is expected to speed up this summer as the car chip shortage eases. But consulting firm KPMG expects prices to stay elevated at least through the third quarter of this year, and likely into 2023.
As the supply chain untangles and dealerships increase their inventory, buyers will regain bargaining power. But some of the changes to the purchasing experience, such as online buying and the rise of reservations for certain new-model launches, will be permanent. The loss of incentives might be permanent, too. If dealers choose to continue to rely on special orders and keep in-person inventory low even when supplies have increased again, there won’t be the same need for aggressive incentives. The days of paying significantly below MSRP for a new car might be gone for good.
