Getting a sweet deal on a pre-owned car is not going to occur soon. The second-hand car market is currently hot in an absurd way. The rates of used trucks increased 40% more in June 2020 when compared to pre-pandemic months. In June, a nine-year-old vehicle changed hands for $13,200, which is a 30% increase across the same month. A five-year-old car was sold at $24,000, which is $6,000 more if it was purchased a year ago.
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Some valid reasons why used car prices are escalating
The irrationality of used cars rising prices is due to the imbalance in the demand and supply of used vehicles. The demand outweighs the supply, so the prices are pushed high and high. However, the reasons for the shortage in inventory and high demand for used cars are a little complicated.
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Reasons why used vehicle prices are escalating
The used car marketplace is deeply intertwined with the new-vehicle market. The new car production market is undergoing a rough patch, so those issues are seeping down the used car marketplace.
The global microchip deficit is the culprit. Microchips are crucial electrical components and their insufficient supply is hindering the new car production lines influencing their prices. The hike in new car rates and lack of options is pushing buyers towards second-hand car shopping thus decreasing the used car inventories.
As the dealer incentives escalated the new car’s transaction rates hit an all-time high, so more and more buyers are pushed towards the used market. People all set to spend serious dollars on brand new vehicles are now driving the used car rates.
The new car rolling off the production line has declined, which has upset vehicle flow from rental agencies, which are the major sources of used car inventory. The rental agencies buy new cars in millions and sell in a couple of years. During the pandemic, they sold cars in masses, but with traveling needs increasing they resorted to buying used cars and holding them.
As the prices of new cars are escalating higher and higher, people are holding to their aging cars longer rather than trading thus cutting car flow to the used marketplace. Even the leased vehicles are purchased at the term expiry instead of swapping for the new lease.
When will car prices normalize?
The prices that escalated in May are slowly declining, which indicates the supply and demand levels are moving towards equilibrium. The pandemic-induced vehicle-shopping frenzy is partially tapering off but chip shortage is not going away soon.
It means there will be some time before shoppers will see the prices of used cars normalize like pre-pandemic. Even if the new models start filling the inventory, the used car market will not snap back dramatically. It is going to take some time for the new car inventory to normalize, which will slowly influence the second-hand vehicle rates.