Are you looking to buy a car in 2021? Good luck.
Not only is there a serious shortage of cars available for purchase, but the vehicles that are for sale cost a small fortune. According to CarGurus, the price index of used cars has increased by over 30% in the past year.
In fact, some owners are now selling their vehicles for more than they paid. Used Dodge Challengers, for example, are selling for nearly $6,000 more today than when they were purchased new in 2020. When economists have always told us that vehicles “lose value the moment you drive them off the lot,” this shift is jarring.
So what’s up? Why are cars so expensive in 2021? And will the prices be coming down any time soon?
Here’s everything you need to know about today’s crazy car market.
The Great Semiconductor Chip Shortage of the 2020s
You might not know exactly what semiconductors are, but they have a direct impact on your life in several ways.
Semiconductors are the chips that store data and render graphics in all our electronic devices. Every smartphone, computer, tablet, eReader, and game station needs semiconductors to function. As do lots of home appliances, power grids, and (you guessed it) automobiles.
Many of today’s safety features in cars require semiconductors. In a recent survey:
62% of drivers have a backup camera on their main vehicle,
46% have adaptive cruise control, and
38% have adaptive headlights.
Without semiconductors, we don’t get access to these valuable safety features. And these safety features are critical for helping us avoid accidents. 86% of survey respondents say their automatic emergency braking has helped them avoid an accident. Rear cross-traffic alerts and blind-spot monitoring are similarly effective, with self-reported accident avoidance of 84% and 83% respectively.
We’ve become so dependent on this technology that we’re unwilling to drive vehicles without them. For example, 84% of those surveyed say they will only buy cars with rear cross-traffic alerts.
When the 2020 COVID-19 pandemic hit, consumers rushed to buy new electronics for working from home and keeping themselves entertained without going out, so there was a rush of demand for semiconductors. At the same time, China stock-piled semiconductors because of expected US sanctions. And then auto manufacturers canceled orders of semiconductors when vehicle sales took a slight hit at the onset of the pandemic. This led to the chips being sold to other buyers, and no chips left for the auto manufacturers once the demand for vehicles picked up.
This shortage of semiconductors actually stopped production at certain plants for several car companies. And without an adequate number of vehicles being produced, we’re seeing low inventory lead to high prices.
Auto Rental Companies Aren’t Selling Their Fleet
In a typical year, car rental companies sell off their entire fleet of vehicles to make room for new models. This pumps a steady supply of used vehicles into the market every year. But 2020 was not a typical year.
Many car rental companies decided not to buy a new fleet in 2020 because car rental demand was low at the onset of the pandemic. And by the time they realized the demand was picking back up, it was too late to buy new cars because of the semiconductor shortage. So these companies are stuck holding on to older models to have some inventory for their rental customers.
This means the used car market lost access to all those vehicles the car rental agencies normally sell off. This has created a supply problem for the used car market, which has driven prices up substantially.
Low Repossessions and Leased Vehicle Buybacks
In addition to rental car fleets, repossessions and leased cars are typically used to supply large numbers of vehicles to the used auto market. But those are also down.
Fewer vehicles are being repossessed for non-payment thanks to loan accommodations and economic stimulus packages. While this is good news for the drivers who are able to keep their vehicles, it does put more pressure on the already-tight used car industry.
And because of the other supply issues we’ve discussed, more people who lease vehicles are opting to buy their cars once the lease expires because it’s easier than trying to find a new vehicle to lease. This has taken out another supply chain that normally keeps used vehicle inventory steady.
When Will Car Prices Come Back Down?
The excessive growth of car prices has already started to slow down, with some experts saying that the worst is behind us. But that doesn’t mean prices will be back to “normal” right away. It will take time to manufacture more semiconductors, get them into new vehicles, and get the new vehicles on the market. Realistically, we’re probably looking at 2022 before inventory and prices normalize.
Drivers are Willing to Pay for Cars With Safety Features
The discussion of car prices wouldn’t be complete without a reminder of how much value we’re getting out of our smart cars.
Yes, our reliance on technology means we require more specialized parts like semiconductors. And there is a greater risk of experiencing a shortage of these parts, which creates a supply issue and drives prices up.
But the upside is the increase in safety features that help prevent accidents and save lives. Most drivers are happy to pay more for these safety enhancements. Our survey data shows that:
94% of drivers with pedestrian detection and rear cross-traffic alerts say these features were worth the additional cost.
96% of those with a self-driving feature and automatic emergency braking find that these are worth the cost.
And 93% of drivers with a backup camera say the same about this feature.
So we don’t mind paying a little more for our vehicles. We just want the price to be a reflection of the value, not a supply shortage.
Safety Features Aren’t a Substitute for Safe Driving Practices
One day, autonomous, self-driving cars may take over the roadways (56% of those surveyed see that happening in the next 10 years!), but for now, safe driving practices are still your best defense against car accidents.
If it’s been a while since you brushed up on safe driving techniques, enroll in a defensive driver course today for a quick refresher. Online courses are convenient and affordable, so you can spend less on your course and more on your car.