It’s (finally) a good time to buy a car—here’s why

Many aspects of life have changed a lot as a result of the pandemic, and car buying and selling is no exception. The scarcity of new cars we’ve seen over the past couple of years is unlike anything most of us have experienced in our lifetimes, and the resulting spike in used car prices has been equally jarring.

A lot of people have been holding off on buying a used car, thinking that it would be crazy to buy a car in the current market. And the current state of the economy, and high rate of inflation, has added even more reluctance to make big purchases in general, especially cars.

But now might be the best time we’ve seen in a while to buy a used car, and there might not be a better opportunity for a long time to come.

Here are some of the reasons the market has gotten the way it is, and why it may be time to go ahead and make that used car purchase you’ve been waiting on.

Why is the used car market so different now?

The impact on used car pricing and availability has basically trickled down from the new car market. The shortage of new cars has in turn created more demand for used cars—unable to go to a dealer and find a car to buy on the lot, many buyers are instead turning to used cars.

1) All-time-high new car prices

In ‘normal’ times, most car buyers are able to negotiate a purchase price below MSRP—often thousands below. That’s because dealers have typically always had a large inventory of new cars on their lots. When dealers keep inventory, they have ‘carrying costs’ that include the interest they’re paying on those cars. Essentially, each car costs the dealer money each month to keep it in inventory. This factors into a dealer’s motivation to sell the car, especially if that particular car has been in inventory for a few months.

Additionally, in a normal car market, manufacturers often provide incentives to dealers (in addition to promotions and discounts for buyers) for meeting certain sales numbers each month, quarter, and year. Reaching these goals can unlock cash bonuses for the dealer, as well as increasing their allocation—selling more cars allows them access to greater ordering volume.

But during the pandemic, this all changed. There were more buyers than cars to sell. Suddenly, manufacturers didn’t have to offer any incentives to dealers or buyers. And dealers didn’t need to discount cars to sell them. In fact, many of them started marking up the limited number of cars they did get, pricing them at higher than MSRP. This, naturally, drove a lot of would-be new car buyers to purchase used instead, and raised used car prices proportionately.

2) Higher car buying demand

During the pandemic, several factors contributed to the increased demand for cars.

First, a significant number of people moved away from urban areas. That often meant that city-dwellers who didn’t have or need a car moved to areas where where they couldn’t rely on public transportation or walking to get places, so they needed to buy at least one car—or, in the cases of two-driver families, maybe two cars.

Second, because most people weren’t going on vacations or going out to dinner, sporting events, or other activities they’d typically spend money on, they had a lot more disposable income. Which, for many car enthusiasts, meant spending that money on more cars.

Finally, even some people who lived in cities and didn’t have a car before ended up buying one as an alternative to public transportation, in order to stay isolated from others and minimize their risk of infection.

3) Rental car companies

Yes, you read that right. It seems like an unlikely element, but rental car companies have had a big impact on wholesale/auction prices. At the start of the pandemic, they sold off the bulk of their fleets (which they typically order new from manufacturers). Then, once the world began to reopen, and people started traveling again, there was a massive shortage of rental cars. 

As a result, rental car companies were desperate to buy up cars to rebuild their fleets. Their primary source for those cars was wholesale auctions—where dealers typically sell trade-ins or buy specific used cars for their inventory. But the rental car companies coming in and buying used cars at auction played a significant role in driving prices up, massively; in December 2021, wholesale auction prices were up 48.1% on average compared to December 2019.

Is it a good idea to buy a car right now?

You might be asking yourself, ‘should I buy a car now or wait until 2023?’ This may seem counterintuitive, but in most cases the answer is yes, you should buy a car now. For several reasons:

  1. If you’re asking this question, you probably need a car. If you’re like a lot of people, you’ve put off buying one in the last couple of years due to the abnormally high prices. 

But now that more time has passed, you probably need one even more than you did before—if you were looking to replace a car that was old or unreliable, it’s even older and probably more unreliable now.

Likewise, if you needed a different type of vehicle—swapping out a sports car for a more family-friendly car, for example—that need has probably only intensified.

  1. Used car prices are beginning to stabilize. They’re still higher than they used to be, but they’ve normalized a bit in the past few weeks. Part of the reason for the correction is probably the increase in interest rates, as well as economic instability.
  1. Prices may never go back to the way they were. And if they do, it will likely not be anytime soon.

That’s because new car supply is still severely constrained. The chip shortage persists, 

as do other supply chain challenges. The war in Ukraine has significantly limited 

production of wiring harnesses, as that country was a large producer of those and other 

critical components for several manufacturers. These shortages and their impacts are 

likely to last well into 2023.

Additionally, a lot of manufacturers have substantially increased the MSRP of their cars

That’s both to offset the fact that they haven’t been able to produce or sell as many cars 

as normal, and also because cars being sold at additional dealer markup (ADM) has 

demonstrated that they simply can charge more. These higher MSRPs for new cars will 

also keep used car prices at higher than normal levels.

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