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Why used and new cars are so expensive right now, explained in 3 charts

Business
Ram trucks at a car dealership.
The supply of new vehicles may never get back to normal.

  • The pandemic has thrown the auto industry completely out of whack.
  • The amount of new cars available to buy in the US has plummeted by 75% since March 2020.
  • As a result, prices of new and used cars have soared.

Buying a new set of wheels used to be moderately stressful. Now it can be a nightmare.

New cars are incredibly scarce. Used ones are absurdly expensive. Competition among buyers is fierce. And things seem to keep getting worse.

But what exactly is going on here?

In a nutshell, the root of the chaos is a shortage of computer chips that’s forced car companies worldwide to build far fewer vehicles. Automakers from General Motors to Toyota have cut millions of units of production because they simply don’t have the chips necessary. A modern vehicle can require thousands of them.

Manufacturers slashed their chip orders early on in the pandemic, but demand for cars roared back way quicker than they expected, leaving them scrambling for semiconductors. Worldwide appetite for connected microwaves and other smart devices gobbled up lots of the supply, while Covid-19 outbreaks and other unrelated disasters further knocked the chip industry off track.

But people kept buying cars and chipping away at the supply. At this point, the number of new cars available to buy in the US is at a mere fraction of typical pre-pandemic levels.

Fewer new vehicles to go around means manufacturers and dealers don’t need to offer big discounts anymore to keep cars moving. They’ve found that buyers are willing to pay up when the only other option is not buying a new car at all.

As the supply of new vehicles has spiraled downward, average transaction prices have skyrocketed. According to Edmunds, people are buying new cars for $278 above their suggested retail price on average. It’s a huge shift from before the pandemic, when paying $2,000-$3,000 below retail was typical.

Limited options and bloated prices on the new market have forced buyers to invade the used market, driving up prices there as well.

Even older vehicles are commanding high prices. Edmunds says the average five-year-old vehicle went for a whopping $24,495 in September. They were trading for $18,469 just before the pandemic hit.

Some industry watchers project that the chip crisis won’t sort itself out until at least 2023. And even once carmakers resume full production capacity, it’ll be a while before dealer inventories get back to normal – if they ever do.

Because they can now charge more for each unit, car companies and dealers have raked in huge profits in 2021, despite slower production and sales. More limited, targeted production may be where the industry is headed. That means higher prices may be here to stay for the long haul.

Read the original article on Business Insider
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