Not in a very long time has the car-buying process been so challenging. Finding the desired car alone can seem impossible. Can you afford it if you do discover it? And if you can afford it, will it arrive in a timely manner? Many drivers have begun to question whether it is still worthwhile to purchase a car at this time due to factors such as chip shortages, supply chain problems, issues with global production, and shifting economic conditions.
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Why Buy Now?
Even though new-car prices are at record highs and the supply is still limited, some buyers will benefit from purchasing a new car sooner rather than later, especially those who have a car to trade in. This is due to the fact that high new-car prices can be partially offset by a generous trade-in value. In the near future, monthly car payments and auto loan rates are both expected to rise.
Your Trade-in Bucks Depreciation Trends
While the depreciation rates for new cars vary greatly, according to Experian, under normal circumstances a new car loses 20% of its value on average after the first year and continues to lose 10% until it reaches the five-year mark. That means a used car that is five years old will typically retain about half of its initial value.
But these aren’t normal circumstances: Your trade-in may be worth a lot more now than the depreciation formula predicts due to inflated used-car values. In May, the average trade-in equity was close to $10,000, up 59% from the previous year, according to J.D. Power’s most recent sales report. Higher trade-in values can help offset some of the premiums for new vehicles.
Similar patterns can be seen in the median used-car prices offered by Cars.com dealers: The median price of a used car in May was $25,095 — a 47% increase from May 2019, before the production issues brought on by the pandemic. The good news is that dealers are more likely to make generous trade-in offers in an effort to fill their lots, even though higher used-car prices are bad news for shoppers on a tight budget.
How quickly the value of your used car is increasing is another factor. According to a Cars.com survey, roughly two-thirds of car owners who traded in their vehicles received a higher offer than anticipated: About half received over $1,000 more than anticipated, and 20% received $3,000 or more. Model-year 2018–21 variations of the Tesla Model 3, Kia Optima, Toyota RAV4 Prime, Tesla Model Y, and Toyota Corolla are the top five vehicles with the fastest increasing resale value, according to data from Cars.com.
New Cars May Get Even More Expensive
The global shortage of microchips initially contributed to the inventory problems for new cars, but cascading supply chain problems have kept prices elevated. Tyson Jominy, J.D., claims Parts and components like tires, paint resin, wiring harnesses, and seats are delayed in arriving at manufacturing plants, according to Power’s vice president of data and analytics.
“Many of the components are single-sourced, so trouble at one supplier can cripple production at multiple automakers,” wrote In an email to Cars.com, Jominy
Because of these persistent problems, production isn’t anticipated to get back to normal until 2023, and inventory levels might not improve until the second half of 2023. Significant cash incentives probably won’t return until inventory levels are raised, and in the interim, new-car prices may keep rising.
“There are still several incentives out there, but automakers may be using them differently,” wrote Jominy. “Some incentives will persuade customers to use the captive lender owned by the automaker, but none of them are significant “cash-on-the-hood” levers. Before the second half of 2023, when it is anticipated that inventory levels will surpass the 2 million mark, incentives like those are unlikely to reappear in large quantities. [Even so, we do not anticipate receiving a return of extremely large cash sums.”
Higher Interest Rates Expected
In addition to rising new and used car prices, auto loan interest rates are also rising and are expected to continue to rise in the wake of the Federal Reserve’s most recent rate hike, which was the largest since 1994. J.D. Power estimates that the average interest rate for May was 4.92%, up 0.62% from the previous year. Further rate increases will contribute to higher monthly car payments:
“As a rule of thumb, every [1%] increase in interest rates either cuts purchasing power by about $1,250 or increases monthly payments by $20,” wrote Jominy. “The [0.75%] rate increase by the Fed might be interpreted negatively by many lending institutions, leading them to raise lending rates even further.” Shoppers can save hundreds or even thousands of dollars over the course of the auto loan by locking in a lower interest rate now.
Reasons To Wait Until 2023 To Buy A New Car
Some Production Runs Already Sold Out
Many completely new and redesigned models that were scheduled to hit the market in 2020 as 2021 model year offerings were postponed until mid-2020, and some of them were even kept back for the 2022 model year. As a result, you might have wanted to wait to see and test drive a lot of brand-new models before deciding to buy. Unfortunately, not everyone has that viewpoint, and customers have been placing orders and waiting for the production of their new cars.
One of my Canadian friends is a huge Corvette enthusiast. His relationships with several Chevy dealers are strong, but not even he knows when his new C8 will ever be delivered. Even though you may have ordered a 2022 Camaro in 2021, the 2023 model may be unveiled before you receive your 2022 Camaro.
It’s extremely unlikely that you’ll walk into a dealership and discover a brand-new 2022 Corvette C8 for sale because cars like the Corvette are typically only produced in small quantities. Who knows when the situation will improve since that will have an impact on the 2023 model year. Even if you decide to purchase a new vehicle in 2022, you might have to wait until some point in 2023 to take delivery because the Corvette isn’t the only model in this situation.
Global Shortage Of Semiconductors
The automotive industry experienced another shock when a global shortage of semiconductors materialized, just as automakers were about to resume full production capacity—or something close to it. But why would a shortage of computer chips have such a negative impact on the production of new cars, and how did it start?
Due to the coronavirus pandemic, there is a greater demand for all types of consumer electronics, which has led to a global shortage of semiconductors (computer chips). For work, play, entertainment, and socializing, millions of people who chose to stay at home grew more reliant on electronic devices.
To meet the unprecedented demand for new phones, laptops, set-top boxes, TVs, tablets, and everything else, there wasn’t much additional capacity available because manufacturing semiconductors isn’t an easy process by any means.
It’s simple to take things like brand-new cars for granted and to not give their construction enough thought. But a significant portion of the modern car features we take for granted, like infotainment systems, engine management systems, climate control, ABS, traction control, and a host of other things, are actually controlled by computer chips. As a result, the absence of computer chips equates to the absence of new vehicles, and even a shortage of chips produced specifically for the automotive sector results in a sharp reduction in output.
Lingering Effect Of Coronavirus Restrictions
After all we’ve been through since the beginning of 2020, it might seem like a long time ago, but the effects of what the coronavirus did are still being felt well into 2022 and possibly longer.
Many western nations decided to reject established World Health Organization pandemic planning and instead adopt the lockdown strategy of the Chinese Communist Party when coronavirus was still a relatively unheard-of threat and no one really knew how to combat it. The auto industry was among the many manufacturing facilities that were closed in large numbers as a result.
Few Or No Incentives From Dealers Or Manufacturers
2022 is another bad year to buy a new car because there are few or no incentives whatsoever being offered on new cars by dealers or manufacturers. In essence, it makes sense. Why on earth would dealers and manufacturers want to offer discounts or incentives if there are more people looking to purchase new cars than there are available cars to sell?
Incentives are provided by sellers when they need to draw in buyers, but when they have too many, there is no need for them to offer discounts on vehicles they can sell to the next buyer for the full MSRP. If there isn’t already a waiting list for that specific model, the next person will arrive almost immediately at the present time.
Economic Uncertainty
Although it may seem like things are improving, which they very well may be, we still live in uncertain times, so who can predict what economic shocks will occur in the near future? Let’s face it: nobody anticipated that a major European democracy would be invaded by one of its neighbors. The majority of people will invest a significant amount of money in a car, which is their biggest non-housing purchase.
Are you confident in the security of your employment? How will things like rent, interest rates, inflation, and other costs fare? What if a new, more dangerous strain of the virus emerges and causes the government to want to impose more lockdown restrictions when winter arrives, when respiratory viruses always flourish? At the time this article is being written, a new version of omicron is making the rounds, and as expected, some are calling for restrictions to be reinstated.
Even though everything might remain largely the same, the near future has never been more uncertain. Are you confident enough in your situation and your finances to move forward with such a significant purchase at this time?
Bottom Line
It’s difficult to buy a car right now because both new and used car prices are at record highs. Although inventories on car dealership lots are getting better, automakers are still having trouble keeping up with demand because of supply-chain disruptions brought on by the shortage of semiconductors. In the near future, it’s unlikely that you will be able to avoid paying high prices for a car, but if you’re savvy, you can negotiate for the best deal.
