Prices of Used Vehicles
Used vehicles have had one or more retail owners in the past. The price of these cars soared by 42% from December 2019 to October 2022, based on the U.S. Bureau of Labor Statistics (Vincent). Over the past year, prices of used cars have skyrocketed by 40.5 percent, as indicated in the New York Times article (see figure 1) (Casselman). As of July 2019, used cars cost an average of $17,500 at car dealerships. The median price jumped 37% by July 2022, making the used car retail approximately $24,000. It indicates pre-owned car prices have increased by over $6,500 since 2021. Generally, dealers have continued to pay record-high costs, reversing the trend of easing inflation. The high prices of used cars signify that upward pressure on prices could last longer, increasing the burden on already financially-strained consumers.
Price Change Analysis
The used car marketplace is sensitive to changes in supply and demand like any other market. Buyers have consistently experienced high demand and low supply since the COVID-19-induced recession. Due to job uncertainty and rising living costs, consumers were forced to postpone car purchases (Vincent, par. 7). Instead of purchasing new but expensive new cars, consumers opted for used vehicles, increasing demand and prices.
The used car supply is a complex process that starts with the new car industry, which was disrupted by a confluence of unusual forces like the covid pandemic and computer chip shortage. The car industry canceled order parts and stopped production, expecting prolonged disruption due to the COVID-19 pandemic (Vincent, par. 9). demand for pre-owned vehicles resumed unexpectedly after the pandemic. At the same time, automakers could not supply more vehicles, forcing buyers to look for used cars. Rental car companies have also resorted to buying used cars rather than flooding the market with new rentals (Casselman). Consequently, the supply of new cars and rental inventory will likely remain tight despite improving vehicle production, which may keep used vehicle prices high throughout 2022.
The demand and supply model shown in figure 2 illustrates the rise in used car prices. The demand curve shifted from D1 to D2 since consumers priced out of new cars opted to purchase used vehicles. Supply of used cars also shifted from S1 to S2 since car dealers could afford to buy fewer cars from suppliers. Therefore, the prices of used vehicles rose from P1 to P2 while the quantity of sold cars fell from Q1 to Q2.
Impact of Price Change on People’s Lives
Buyers are the most affected by the increased prices of pre-owned vehicles due to pressure on the household budget. The higher prices force buyers to take large loans to purchase cars and repay over an extended period. Loans paid over a longer duration become a problem when the car value drops faster than the loan due to depreciation or declining market values. It can leave the individual with no equity to purchase a new car or significant losses if the vehicle is stolen or written off in an accident. The high prices have also increased interest rates, making used cars too expensive for the growing number of car buyers.
Although drag on sales, plunging earnings, and inflation pressures can affect car dealers negatively, they are the benefactors of skyrocketing prices. The high prices lift their revenue significantly if they sell stock at a higher value than the expected market price. Used cars have also become a lucrative asset for car-owner opting to sell and repay their car debts with some cash to spare. For example, a new vehicle retailing at $18,000 in 2020 had a resell value of $23,000 a year and a half later.
Underlying Social and Historical Cause
Peak inflation in the used car market was witnessed in 2020 during the COVID-19 pandemic. The pandemic caused a backlog that shuttered vehicle production companies worldwide, driving up the shortage of new cars in the market (Török). People became unwilling to relinquish their cars into the second-hand car market due to uncertainty, loss of income, and disruption caused by corona outbreak. Therefore, the market became deprived of new and old vehicles, driving up prices since the flow of new cars determines the availability of pre-owned vehicles. Logistical hurdles following the pandemic also contributed to the massive climb in used car prices in 2020 and 2021.
The ongoing global shortage of microchips needed for modern vehicle production also affected the manufacturing of new vehicles. Therefore, new car prices skyrocketed beyond reach for most buyers while needs remained high. Autos selling at higher prices meant the demand spilled over to the used car market, increasing demand and prices for second-hand vehicles. Alongside the shortage of materials, consumer priority shifted to used vehicles to cut expenditure on new cars. Therefore, prices of pre-owned cars skyrocketed due to the latest trend in consumer demand, forcing the prices to rise above the standard market valuation.
Work Cited
Casselman, Ben. “Car prices rose more slowly in January, but new disruptions loom.” The New York Times. 2022. Web.
Török, László. “The Link Between Car Sales and the Economic Crisis in the European Union at the Time of the Covid-19 Epidemic.” International Journal of Economics and Business Administration, Vol 8, no. 4, 2020, pp.1033-1042.
Vincent, John. “When Will Used Car Prices Go Down?” The U.S. News. 2022. Web.