In 2021, used cars challenged all stereotypes attached to the word “used” when their market value skyrocketed beyond expectations. In the words of Jim Bianco, a market researcher, “Used car prices are rising faster than bitcoin and other assets.”
Gone are the days when cars were just a means of transportation. Now, those are potential money market ventures, at least as of January 2022. There is a typical saying that new vehicles lose a quarter of their value when you take them out of the auto store where you bought them, and it couldn’t be. not be more true. . Research shows that a normal vehicle deteriorates by 23.5% during the first year of use.
However, it may shock you to find out that four or five year old cars still cost a large portion of the cost of the current year model. A KPMG research report revealed that used car prices rose 44% in November 2021. The reasons are not far-fetched when you consider market influences and the impact of the COVID-19 pandemic.
Taking a closer look at this intriguing situation, we’ll take a closer look at how we got to the used car bubble and why used cars are still very expensive.
A plausible cause of the used car bubble
Usually, the used car market is supplied by individuals who regularly offer their cars for sale to buy another. However, the difficult financial situations caused by the COVID-19 pandemic have reduced the financial capacity of people to buy new cars; instead, they keep their old cars.
As a result, there is less availability of used cars for sale. Low demand in the new car market invariably results in low supply in the used car market. The effect of this auto market situation is that the prices of available used cars increase dramatically, as there are only a limited number of used cars available in stock.
At the onset of the pandemic, vehicle manufacturing across the world came to a sudden and unfortunate halt in 2020. For example, in April 2020 in the United States, auto manufacturing declined almost 100% from its February 2020 level, as indicated by information from the United States Economic Analysis Agency. In other words, it’s safe to say that the 2021 used car bubble is not a new invention, but rather a continuation of what came into being with the 2020 pandemic.
In response to the weak demand for new cars, automakers are releasing a smaller stock of new cars, which leads to an increase in the cost of new cars. The negative effect of this situation is the discouragement of people already embarrassed by financial difficulties from buying new cars.
In addition, rising unemployment rates and financial strains have forced individuals to simply buy old cars instead of new cars. Instead, some people are forced to keep their old vehicle and incur less expense to repair auto parts than to buy a new car.
Basically there is a decrease in the supply of used cars in the market because individuals are holding back the sale, and there is an increase in demand for used cars because that is what individuals can afford at the moment. Hence the used car bubble of 2021.
Are we expecting the used car bubble to burst in 2021?
The government’s efforts to ease the financial hardship caused by the pandemic have had a significant impact on the used car bubble. A few states in the United States have made efforts to provide their residents with assistance in suspend repossession of vehicles.
To support the government’s efforts, private organizations, including banks, are offering conducive financial facilities that allow borrowers affected by the pandemic to defer car loan payments subject to conditions.
Normally, banks will repossess a vehicle after a few missed payments. Nevertheless, during these difficult occasions, the 90 and 120 day deferrals have become the norm for most brands. So, it is only a matter of time before the used car bubble begins to burst in situations more conducive to used car market prices normally.
A gradual transition to normal
The impact of the coronavirus pandemic can be substantial, but it must be seen as fleeting. There has been a gradual easing of supply chain constraints in the automotive market. People are returning to their normal lives and their business activities. There is bound to be an increase in financial capacity which will invariably increase the demand for new cars.
An increase in the demand for new cars leads to an increase in the supply of used cars. As a result, there is a gradual transition to normal prices in the used car market. It may be overkill to expect return to pre-COVID19 used car market prices, but it may also be a short time before we see the end of the 2021 used car bubble that will create new normal prices in the decency bracket.
An artist gave the classic model a widebody digital processing to imagine what a Mopar nameplate revival might look like.
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