Why are Car Prices So High Right Now?
The automotive industry has always been susceptible to ebbs and flows in the economy, but the COVID-19 pandemic has disrupted the entire industry in a way nobody could have predicted. With auto manufacturers shutting down production for weeks at a time, a shortage in raw materials, and a surge in demand, prices for new and used cars have skyrocketed. But what exactly is causing these high prices and will they come back down any time soon? Let’s take a closer look.
Shortage of New Cars
The pandemic caused many car manufacturers to stop production temporarily to protect their workers’ safety. Some manufacturers shut down their factories for several weeks or even months. Now, they are facing difficulty in acquiring the necessary computer chips required to create the technologically advanced cars consumers demand. The shortfall has led to a backlog in vehicle production, with Ford, for example, expecting to lose manufacturing of 1.1 million vehicles so far in 2021. Furthermore, manufacturers have been unable to build up a steady inventory of new vehicles, causing dealerships to have a smaller supply from which to choose.
Surge in Demand
As more and more people shifted from public transportation to private vehicles, there has been a surge in demand for cars. Carriers’ current vehicle inventory is not enough to meet the escalating demand. In fact, the level of demand for cars has grown to about 5.5% more than the current supply for cars currently in the market, a deficit that is expected to remain into the new year. Consequently, dealerships are selling their cars at premium prices, given the high demand for vehicles, and because demand is higher, fewer incentives are being offered to customers.
Rise in the Cost of Raw Materials
The auto industry primarily relies on supplies such as steel, copper, and aluminum to make cars. The pandemic disrupted the supply chains globally, leading to a shortage of raw materials. These supply constraints, coupled with the increase in demand, led to a spike in prices. Hence, the high prices of raw materials directly impact car prices, and automakers are passing these increases onto consumers.
The Impact on Used Car Prices
Not only have new-car prices surged, but the price of used cars has also risen to unprecedented levels. With manufacturers struggling to produce new vehicles, consumers are turning to the used car market to find their dream car. However, there is a shortage of used cars as well, leading to prices of pre-owned vehicles skyrocketing.
Will Prices Go Down Anytime Soon?
As a result of these factors, it is unlikely that car prices will come down any time soon. Manufacturing companies are still facing supply constraints, whilst the demand for vehicles remains higher than ever. Dealerships across the nation have even had to resort to installing “market adjustment” fees, essentially a price hike on already high-priced vehicles, to meet the demand for new cars. The high prices customers have been seeing are here to stay for the foreseeable future, and it is expected to be several more months until the situation improves.
In summary, the COVID-19 pandemic has caused unforeseen disruptions to the automotive industry. A shortage of new vehicles, coupled with rising raw material costs and higher demand, have led to surging car prices. However, with the vaccination rollout and manufacturing companies slowly easing restrictions, the situation is expected to improve, and car prices should come back to the pre-pandemic levels, although it could take a while.