New and used cars: how long will prices continue to rise?

Car prices rose at a breakneck pace during 2021 and 2022. As of Febuary 2023 new cars were selling for 30 percent more than three years before, while used cars were up a staggering $4,000 from where they were just two years ago. Coupled with the higher cost of borrowing as the Federal Reserve aggressively raised interest rates and elevated gas prices made car ownership more dear.

What caused the rapid increase in car prices? A domino effect starting with supply chain bottlenecks as a result of the covid-19 pandemic which throttled the number of new cars coming off manufacturing lines. As prices rose, fewer new cars were purchased.

This in turn crimped the supply of used cars available for those seeking a pair of wheels to get around. The dynamics have improved but it’s expected that it will still take some time before things return to normal, if ever.

When will car prices become more affordable?

The good news is that new vehicle prices have been dropping for three months with the average transaction price at $48,763 in February according to Cox Automotive. New car prices are expected to maintain their downward trend in the months to come. Used car prices have been cooling as well for the past six months, but they may begin to rise again as supply tightens once more.

The main driver of the lack of new cars that had been fueling the skyrocketing prices was the microchip shortage. This has begun to ease but suppliers are still behind on meeting orders they have from car manufacturers. Then there is the fact that carmakers and dealers learned that they could keep prices higher if inventory was lower.

As prices have jumped, Americans began buying fewer new cars in general, with the average number of 17 million purchased each year before the pandemic dropping to 13.7 million last year. And there are not as many inexpensive models on the market, with the number of new car models available for under $25,000 going from 36 to 10 in the past five years. This has resulted in a 78 percent drop in sales of inexpensive cars.

This trickles down into the used-car market, as fewer new car sales means fewer trade-ins which leaves dealers with fewer used cars. Adding to the used car inventory problems are more would-be new car shoppers buying used cars reducing the supply.

On top of that Americans are holding onto their vehicles for longer, with the average car on the road now over 12 years old. It is now difficult to find a vehicle for less than $15,000, a situation that will most likely linger for some time to come.