Used Car Shortage: Could We Be Headed For a Bubble?

If you want to buy a used car, good luck. A perfect storm of factors combined to quickly heat up the used car market in 2021. Even as the pandemic began to ease, government assistance helped many people catch up on bills and start to shop again. Nervous about public transportation during a global pandemic, Americans sought out cars. Unfortunately, automakers had few new cars to sell because of a worldwide microchip shortage that left the auto industry building fewer cars than planned. That pushed new car prices up, with the average new car selling for more than $46,000 in November. Higher new car prices sent shoppers into the used car market, but that market was rocked by its own wave. Automakers had trimmed production after the 2008 recession, so that left fewer of the older, high-mileage used cars dealers sell for under $10,000. With more buyers but only a small supply of expensive, recent cars, the used car market saw inflation that made new car prices look tame. So what happens next? As the microchip shortage and other supply chain problems ease, the massive auto manufacturing machine will shift back into high gear, and dealer lots will again be full. When that happens, the used-car market could collapse. That would imply a drop in used car prices by about 30% below where they are today. There’s little good news for shoppers in the projections. The average car on American roads is over 12 years old now, so many who bought late-model used cars may keep them long enough that a crash in trade-in value wouldn’t affect them much. The best advice from the experts is: If you can, this is a good time to fix your existing car and keep it running until prices stabilize.