The Used Car Market Crash Is Coming: Here’s How To Prepare

Image source: Getty Images

The average price for a used car in America is currently $28,205, which is 28% more than a year ago and 42% more than it was in December 2019. But used cars aren’t the only items whose prices have skyrocketed. Inflation has risen 7.9% in the past 12 months, the highest increase in 40 years. Just as used car prices have skyrocketed, Americans should be prepared for used car prices to be 30% lower than they are today.

Why are used car prices so high

Used car prices have skyrocketed due to the global shortage of semiconductor chips. In response to the pandemic, microchip manufacturers have reduced chip production. But then the global economy rebounded faster than expected, and many Americans used pandemic relief programs to buy new cars. This helped create a massive shortage of chips.

With only a few microchip manufacturers around the world, the supply was not able to keep up with the demand. According to Goldman Sachs, the average new car requires 298 computer chips, which is 40% more than cars built before the pandemic. With car manufacturers unable to get enough microchips, production of new cars stopped and prices for used cars skyrocketed.

Why can used car prices drop

Currently, chipmakers are catching up with demand, supply problems caused by the pandemic are fading, and automakers are turning to producing enough new cars to plug the deficit.

This auto market normalization, combined with higher interest rates in the pipeline, could drive used-car prices down 30%, according to KPMG. Higher interest rates can increase the cost of borrowing money, reducing the demand for used cars.

According to KPMG, by the time the car shortage ends, $1 trillion worth of new and used cars could be financed well above pre-pandemic prices. People who are overpaying for used cars today may see themselves underwater in their car loans.

How to prepare for lower used car prices

It’s the time to be a seller, not the time to be a buyer. The high costs of all necessities shrink family budgets. Applying a budget can help you reduce the impact of inflation and find other ways to save. Check your personal finances and make a plan to keep your expenses low.

The perfect supply and demand storm created a temporary and unsustainable rise in used car prices. Like any financial bubble, what happens, must collapse. When it explodes, car owners may owe more than the car is worth. If you are looking to buy another car, focus on taking care of your current car until the car is more affordable.

The best strategy is not to panic. Make sure you buy a car that you can really afford, and remember that cars go downhill over time. If you need to buy a car now, look to buy the cheapest car as a bridge to the car you want until car prices drop later this year.

Earn up to 5% and redeem interest until 2023

Our in-house credit card expert loves this top pick of credit cards, which has its features a 0% Introduction April Until 2023, this can help you avoid interest charges on new purchases or pay off debt faster with simple balance transfer strategies. Additionally, this selection is packaged at an insane cashback rate of up to 5% with no annual fee. In fact, this card is so good that our credit card expert personally uses it. Click here to read our full review for free and apply in just 2 minutes.
Read our free review
We believe strongly in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by our covered advertisers. Ascent does not cover all offers on the market. The Ascent editorial content is separate from the Motley Fool’s editorial content and is generated by a different team of analysts. The Motley Fool is owned and recommended by Goldman Sachs. Motley Fool has a disclosure policy.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

Leave a Reply

%d bloggers like this: