May 17, 2022

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Half the Automotive

What to expect in the 2022 used car market

Car prices have been surging for over a year, as the pandemic disrupted supply chains and caused shortages in critical auto components like semiconductors, resulting in a lack of new vehicles hitting the lots.

But as bad as things are for new car prices, things are even worse for used vehicles. The lack of new cars available has created an absolute frenzy in the cheaper used car market. Since March of 2020, used car prices are up a staggering 39.8%, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index. During that same period, the BLS inflation measurement for new car prices is up 8.9%, while overall, U.S. inflation is up 6.3%.

“There’s just not a lot of cars out there, and if you go in and walk some lots, you’ll notice that it’s not there,” Jim Lyski, executive vice president and chief marketing officer for CarMax, tells Fortune. “The consumer doesn’t really have their first pick right now, and so they’re going down to their second pick, third pick, or they don’t want to wait for production to release new vehicles, so they’re going into the used car market.”

And prices are still on the rise, observes Lyski. He says prices have persisted in moving up “over the last few weeks,” estimating “the average purchase price of cars are inching up $100, $200 a week,” he noted late last month based on CarMax’s vantage point.

But what does this mean for consumers? Should they pony up and pay these prices, or hold out for future deals? To better inform would-be buyers, Fortune explored how we got here, and where prices and inventory might be headed in 2022.

Why are used car prices so high?

At the onset of the pandemic, auto manufacturing across the globe came to a screeching halt. That’s not an exaggeration: In April 2020, the U.S. saw auto production drop 99% from February 2020 levels, according to U.S. Bureau of Economic Analysis data. By the summer of 2020, the automotive industry did begin to rebound, but that was short-lived: Component shortages and delays—caused by a disrupted global supply chain—caused monthly U.S. auto production to fall again. In total, U.S. car production fell 23% in 2020, and it’s currently on pace to fall another 8% this year.

The decrease in vehicle production is worse for the market than it might first appear. The car market is continuously losing vehicles to a combination of life cycles and accidents. That phenomenon, referred to in the industry as “car scrappage,” combined with decreased auto production, saw the total number of vehicles in the U.S. decline between the second quarter of 2020 and the first quarter of 2021.

But shrinking supply isn’t the only factor driving prices higher. There has been a big uptick on the demand side, too. Some of that can be attributed to interest rates on auto loans hitting rock bottom levels during the pandemic. In addition, Dan Hearsch, a managing director in the automotive and industrial practice at AlixPartners, says people moving out of big cities and not wanting to take public transportation or ride sharing as a result of COVID-19 health concerns “has driven them to buy vehicles.”

What will it take for prices to normalize?

The simple answer is for supply chain issues to get worked out and production to return to normal levels so that supply and demand can balance out.

But easing those upstream shortages and supply chain issues won’t be easy. The well-documented supply chain kinks that are causing the so-called everything shortage don’t have one culprit, save for the pandemic broadly. “It’s a shortage of individual components, which is caused by a shortage of semiconductors, shortages of labor, allocation of steel and resin…There’s lots of disruption,” Hearsch tells Fortune. Not to mention, transportation and shipping issues and delays at ports, he suggests, “are the biggest weak spot at this point.”

On that front, some actions have been taken of late, including President Joe Biden’s deal to open the Port of Los Angeles 24/7 in an effort to alleviate backlogs. But that can only do so much. For auto production to ramp up domestically, chip and semiconductor production in Asia needs time to catch up with demand. The bad news? That chip shortage, in particular, could stretch into 2023.

What can consumers expect in the 2022 used car market?

Industry experts tell Fortune it will likely take well into 2022 (or beyond) for the used car market to start to return to normal.

“As you solve the bottlenecks, and you solve the lack of production, you’ll eventually start to see normal price patterns. But my view is that does not mean we will approach something like what you saw with lumber—which had a major price correction,” Jonathan Smoke, chief economist at Cox Automotive, tells Fortune. His economic forecast has used car prices continuing to rise through the first half of 2022 followed by a small price pullback in the second half of next year.

Others like Mike Jackson, the CEO of AutoNation, note that “consumer demand continues to outpace supply, driven by consumer desire for personal transportation and ongoing manufacturer supply chain disruption,” he said on the company’s most recent earnings call in October, adding that he expects that to continue “well into 2022.” That assessment is shared by CarMax’s Lyski, who doesn’t foresee prices heading back down to 2019 levels “anytime in the next nine, 12 months.”

Hearsch of AlixPartners suggests keeping an eye on the number of days inventory sits on new dealer lots. Once that ticks up “closer to 50 or 60 days of inventory, that’s when you would expect a normalization of pricing,” he says.

“Prices are going to normalize…when new car inventory normalizes, which is going to take all of next year,” Hearsch predicts.

This story was originally featured on Fortune.com