The ongoing semiconductor chip shortage has significantly impacted the automotive industry over the past couple years. New car inventory has been limited, prices have increased, and vehicle production has slowed. Many car buyers are wondering if they should delay a purchase until inventory improves and prices stabilize. There are pros and cons to buying now versus waiting, and the right decision depends on your unique situation and needs. This comprehensive guide examines the chip shortage’s effects on the auto industry, projects when the shortage may improve, and provides tips for buying a car during the shortage.
What is the auto chip shortage?
The auto chip shortage refers to the limited supply of semiconductor chips used in car manufacturing. Semiconductors power the advanced computers and electronics in modern vehicles. From engine control modules to touchscreen infotainment systems, chips have become essential components. The COVID-19 pandemic caused an unexpected drop in auto sales in early 2020. As a result, car manufacturers reduced chip orders. At the same time, demand for consumer electronics surged as people spent more time at home. Chip manufacturers allocated more capacity to produce chips for smartphones, gaming systems and other consumer devices. When car demand rebounded, chip suppliers could not keep up, causing a shortage. Natural disasters affecting chip production in Asia and other factors have exacerbated and prolonged the shortage.
How has the shortage impacted car inventory and prices?
The chip shortage has severely constrained new car inventory, especially for popular models. Dealerships that once stocked hundreds of vehicles now may have fewer than two dozen on their lots. Limited selection makes it harder for car shoppers to find the exact vehicle they want. With tight inventory, dealers have little incentive to offer discounts or negotiate on price. Transaction prices hit record highs in 2021 and continue to climb in 2022. The average new car price recently exceeded $47,000 in the U.S., up around 13% from 2020 levels, according to Kelley Blue Book. High demand relative to low supply enables dealers to charge full manufacturer’s suggested retail price (MSRP) or even above on some models.
When will the auto chip shortage end?
Many industry experts originally expected the shortage to improve by the end of 2022. However, ongoing issues have delayed a full recovery:
- Covid lockdowns temporarily closed chip plants in Asia
- The war in Ukraine impacted raw material supplies for chip production
- A drought in Taiwan restricted operations at chip facilities
- Chip manufacturers have struggled to rapidly increase capacity
Given these headwinds, the shortage likely will persist through 2023 and potentially into 2024 before inventory approaches normal pre-shortage levels. Improvements should happen gradually over the next 12-18 months rather than suddenly.
Should I wait to buy a car?
Whether to purchase now or wait depends on your situation:
Consider buying now if:
- Your current car is unreliable or costing you too much in repairs
- You need certain features like more space for a growing family
- You can afford current prices without overextending your budget
- You find a desirable model at MSRP or with a small markup
Waiting could make sense if:
- Your current car should last another year or two without major issues
- You have flexibility on timing and budget
- You’re not in a rush and can monitor inventory for discounts later
Neither option is necessarily “right” or “wrong” – it depends on your needs and personal situation.
New car buying tips during the shortage
If you decide to purchase a car now, following some smart buying practices can help land a fair deal:
- Get pre-approved financing before visiting dealers – it gives you leverage to negotiate on the car price rather than interest rate
- Consider ordering a customized build if you can wait several weeks or months – you may get your preferred model and options without paying a markup
- Cast a wide net in your search – expanding the distance you’re willing to drive or ship a car can increase inventory options
- Use online price research tools to determine fair pricing – information is negotiating power with dealerships
- Avoid options and accessories you don’t really need – simplified orders may come faster amidst constraints
- Maintain flexibility on color and minor features – compromise if needed to get the car you want sooner
Following a patient, informed buying process can help consumers land good deals, even in a constrained market.
Should I lease or buy during the shortage?
Both buying and leasing have pros and cons during the chip shortage:
Potential benefits of buying:
- You may build equity as car values remain elevated
- Higher trade-in values can offset the premium price you pay now
- You own the car at the end and can keep driving it as long as you like
Advantages of leasing:
- Lower upfront cost than purchasing
- Avoid risks of owning a car through uncertain market conditions
- Payments are based on pre-shortage vehicle values that are often lower than current inflated prices
- Can get a new car with updated features again after the lease ends, when inventory may have improved
Weigh your financial needs, future plans, and personal preferences before deciding between buying and leasing. Leasing makes sense for many consumers, but it’s not necessarily the superior option.
How much should I spend on a car right now?
With high car prices and economic uncertainty, it’s wise to carefully consider how much you can reasonably afford for a new or used vehicle purchase. Follow these tips:
- Aim to spend no more than 10-15% of your annual gross income on a car purchase price
- Factor in ownership costs like insurance, gas, and maintenance – not just the sale price
- Make a budget of what you feel comfortable spending each month for the next several years
- Consider buying a quality used vehicle if new prices exceed your budget
- Don’t overstretch your finances – high monthly payments over a long loan term are risky
Setting a wise and realistic car budget guards against overspending and the financial stress of burdensome payments.
When will used car prices go down?
Like new cars, used vehicle prices skyrocketed during the pandemic and remain well above pre-2020 levels. Several factors contribute to inflated used car prices:
- Limited new car inventory pushes more buyers to used models
- People delayed new car purchases, putting more miles on their current vehicles
- Rental companies kept cars in service longer rather than selling them into the used market
- Used car supply lowered, especially for popular CUVs and trucks
Used car prices should moderate over 2022 and 2023 as:
- New car production increases, sending more off-lease vehicles to dealers
- Higher interest rates discourage some car buyers, easing demand
- Lease returns and trade-ins grow the used inventory
- Wholesale auction prices trend downward
However, industry experts suggest used car prices may remain 10-30% above 2019 figures through at least 2024. Take the waiting game approach when shopping for used vehicles. Time your purchase for when demand cools and more off-lease models become available. Avoid overpaying due to impatience or urgency.
Will high car prices lead to an increase in car thefts?
Surging vehicle prices could tempt more car thieves looking to make money from illegal sales and parts. However, technology advances make modern cars very difficult to steal. Industry experts suggest a limited rise in thefts, but not a dramatic wave. Reasons car thefts may not spike substantially:
- Sophisticated anti-theft systems deter thieves
- Immobilizing chips in keys make hot-wiring nearly impossible
- Increased use of tracking services helps quickly recover stolen vehicles
- Chop shops have a harder time marketing stolen parts
- Insurance and legal consequences act as deterrents
An FBI report showed a 17% increase in U.S. car thefts from 2019 to 2020. But rates stayed well below record highs from decades ago. Drivers should exercise reasonable precautions like locking doors and parking in well-lit areas. But fears of surging auto thefts due to high prices may be overblown.
How to protect your car from theft
Despite the best anti-theft technology, drivers should still follow smart precautions to protect their vehicle:
- Always lock doors, even at home, and keep keys away from windows and doors
- Park in a locked garage when possible, or at least well-lit areas with plenty of foot traffic
- Get a tamper-proof VIN etching that makes stolen parts easier to trace
- Install a vehicle tracking system to help authorities locate your car if stolen
- Keep valuables and packages out of sight to avoid attracting thieves
- Make older model cars harder to hotwire by using extra deterrents like fuel kill switches
Sensible parking habits and anti-theft systems are your best defenses against car theft. Avoid leaving vehicles unattended in isolated areas for long periods.
Conclusion
The ongoing chip shortage has disrupted the auto industry and created challenges for car shoppers. While buying a vehicle may require compromises and patience in the near term, the situation should gradually improve over the next two years. Avoid overpaying or taking on excessive debt during this high-price market. But don’t put off a necessary purchase either – especially if your current vehicle is unreliable. With flexible timing, thorough research, and smart negotiation, consumers can still get good deals on cars that suit their needs, even amid inventory constraints.
