Consumers are clamoring to get cars now, with demand being far higher than supply for both new cars and used cars. Prices have increased and the time to get a new car delivered has risen dramatically. Features are also being limited that was standard even five years ago, with no drop in price.
Average car prices in the US were $40,000 at the end of 2020, and now at the end of 2021, the average new car price is $45,031, which is the first time in history the average price has been that high. Furthermore, experts are predicting that prices will go even higher in 2022.
Used car prices also saw a massive increase starting in 2021, going from an average between $15,000 – $20,000 in the previous five years to now being around $30,000.
Why Are Cars So Expensive in 2023?
New cars are so expensive at the moment because there is a worldwide shortage of computer chips that modern vehicles require, so car manufacturers have had to cut production across the board, which has been limiting the supply of cars, and that increases the price when demand is still high.
Nissan Altimas are one of the most common cars on the road; the price between 1993 – 1997 ranged from $15,649 to $20,999 for a new model. Prices between 2019 – 2022 range from $24,550 to $34,250, and that is starting to verge on being double the price.
Looking at used Nissan Altimas, you see car prices gradually decreasing over the years until you get to the end of 2020, and then prices start shooting up in 2021. The average price of a used Nissan Altima is $18,411, which is an almost 30% increase in price over the 2020 price.
Why Else Are Cars So Expensive Right Now?
Car dealers have found that with a smaller supply of cars but demand jumping back much quicker and higher than expected in 2021, they don’t have to offer discounts or deals for people to buy cars and can even charge above sticker prices when previously consumers could pay well under sticker prices.
Even if you can afford the higher new car prices, the inventory of cars in the US has been cut by two-thirds, so buyers have to move into the used car prices, which is now pushing those prices up. This means both new and used cars are in much higher demand than there is supply.
Every year there is new technology and new features added to every car; this means more expensive equipment is being added to your vehicle that used to just be used for driving, making cars more expensive.
You’ve got GPS in most new cars by default, personal TV screens in the back for the kids, in-car Wifi to get streaming services, and then more enhanced safety features that are becoming standard and required. In cars from the 1990s, you wouldn’t see any of these features; at best, you might get an FM radio.
What Caused The Shortage Of Computer Chips?
Car manufacturers cut their orders for computer chips when the pandemic started, which caused production to drop back. The longer production was cut, the fewer employees and even manufacturing facilities were required. Demand for cars came back much quicker than expected, and it’s taking time to rebuild the computer chip manufacturing infrastructure.
There has also been a significant increase in purchasing other electronic devices in the past few years as people work from home and need or want access to new technology. So the limited supply of computer chips is also being spread thinner by other industries using them more.
When Will The Supply Of Computer Chips Meet Demand Again?
Experts are predicting that it may not be until at least 2023 or later that the computer chip supply matches the demand consumers are making at the moment. Chip manufacturers are building out new facilities to produce the chips, but that requires physical work to build and then to train new employees.
To further impact the supply is the ongoing demand from all sectors that are seeing increased technology into all areas of life. It’s not just cars that use computer chips; its laptops, graphics cards, televisions, phones, anything that has any kind of smarts requires computer chips.
Car Price Increase Comparisons
Every car manufacturer you look at has an increased price almost every year, and when you look at big ranges from 2006 to 2022, it’s even more apparent. Some of this you can put down to new technology or inflation, but some of it is just a steady increase by the manufacturers.
How does your salary compare from 2006 to 2022 percentage-wise to the increase in car cost?
When you look at some of the most common or sought-after used cars on the car sales market you see the dramatic increase in average transaction price, starting in late 2020 the car prices jumped as the world opened back up and people started getting back on the road.
Will Car Prices Drop?
Once there is a sufficient supply of computer chips, which is supposed to happen in 2023 then car manufacturers will be able to bring their supply back up to pre-pandemic levels. This should allow a drop in price due to less competition for cars, but it will depend on car manufacturers wanting to do this.
Car manufacturers and dealerships had high revenues in 2021, even with two-thirds fewer new cars available. Because they could sell the cars for more, this also required less work and cost on their end. So the incentive to drop prices may not be a top priority if they can make the same or more money by doing less.
Car dealers also have less incentive for making deals on price with consumers if there is strong demand for the inventory available. So the retail price of cars may drop down but the discounts and deals there were previously possible may be a thing of the past.
We will see enough supply to meet consumer demands, which will lessen the demand for used vehecles, so used car prices there should drop back to mostly pre-pandemic levels.
Benjamin is a certified financial advisor, with over 10 years of experience in the industry. He is knowledgeable about various business and financial topics, such as retirement planning and investment management. Ben has been recognized for his work in the financial planning industry. He has also been featured in various publications.