The global chip shortage over the past couple years has significantly impacted the automotive industry and resulted in low inventory and high prices for new and used vehicles. As chip supplies improve, many wonder if car prices will start to decrease and become more affordable again. Here’s a quick look at some of the key questions around how the chip shortage has affected car prices and whether relief may be in sight.
How has the chip shortage impacted car prices?
The semiconductor chip shortage has drastically reduced vehicle production since 2020. With low inventory, dealers have little incentive to offer discounts or negotiate on price. New car prices hit record highs in 2021 and 2022, with the average transaction price for a new vehicle topping $47,000 in December 2021, according to Kelley Blue Book. Used car prices also skyrocketed, with some models selling for more than their original sticker price when new.
Are chip supplies improving in 2023?
Chip supplies are gradually improving as fabrication plants increase capacity, but shortages are still expected to persist through 2023. While computer chips remain in tight supply, the situation has eased slightly for less advanced chips used in vehicles. Toyota, Volkswagen, and other automakers are predicting increased production in 2023 as chip availability improves.
When will car prices start to decrease?
Experts caution that car prices are unlikely to drop significantly in the near-term. New vehicle inventory is expected to remain low through 2023, as automakers are still unable to procure all the chips they need to produce at full capacity. Used car prices are also projected to remain elevated due to lingering low supply. Any price reductions are expected to be minor in 2023.
Will car prices return to pre-pandemic levels?
Prices are not expected to return to pre-pandemic levels anytime soon. While chip shortages should eventually ease, structural changes to the auto industry will persist. Autos have become more computerized, driving up production costs. Other factors like raw material prices and wages also remain high. Despite improved chip supplies, these ongoing cost pressures mean automakers are unlikely to be able to return new car prices back to 2019 levels in the next few years.
When will used car prices fall?
Used car prices are expected to remain elevated for at least the next 12-18 months. Prices may start to slowly decline in late 2023 or 2024 as new car production volumes improve, expanding used inventory. However, experts caution used car prices are unlikely to fall dramatically but instead descend gradually. Production constraints, strong consumer demand, inflationary pressures, and low loan rates will continue to provide price support in the used market.
Will EVs and hybrids have better availability?
Electric vehicles and hybrids are expected to see slightly better inventory and availability compared to gas-powered models over the next year. Reasons include the simpler design of EV powertrains requiring fewer chips, high consumer demand driving priority production for automakers, and new EV model introductions. However, supply is still likely to be constrained and waitlists long for the most popular electric and hybrid models like the Ford F-150 Lightning and Toyota RAV4 Prime.
Conclusion
While chip shortages should moderate over the next year, new and used car prices are expected to remain relatively high through 2023 due to continued low inventory, strong demand, and other inflationary pressures. Significant price reductions are unlikely until late 2023 or beyond when supply and production volumes are able to catch up. Even as the chip shortage eases, the auto industry has undergone structural changes that will prevent prices from returning to pre-pandemic levels anytime in the near future. Patience will be required as inventory slowly improves and pricing gradually becomes more favorable for buyers over the long run.
Frequently Asked Questions
How long will the chip shortage last?
The global chip shortage is expected to persist through 2023 but should moderate somewhat by late 2023 or 2024 as semiconductor fabrication plants increase capacity. Full recovery to pre-shortage chip supply may not occur until 2025 or beyond.
What types of cars are most impacted by the shortage?
The chip shortage has impacted all types of new vehicles, but larger vehicles like pickup trucks and SUVs have been disproportionately affected since they require more chips.EVs and hybrids have been slightly less affected than gas-powered vehicles.
Are any car brands seeing improved chip supply?
Some automakers like Toyota, Honda, and Hyundai entered 2022 with chip inventory stockpiled and have been less impacted by shortages in the near-term. However, all major automakers continue to face constraints and cannot yet produce at full capacity.
Should I buy a car now or wait?
There’s no perfect time to buy a car. While prices are high now, waiting indefinitely for improvements could mean missing out on available inventory. Consider your personal needs—if your current vehicle is unreliable or costing too much to maintain, buying now may be worth the premium pricing. For those who can wait, late 2023 may bring slightly improved selection and pricing.
Will used car prices go back up?
Used car prices are expected to remain elevated through 2023 before slowly declining in 2024 and 2025 as new car production and inventory improves. However, prices are unlikely to fall dramatically. Strong consumer demand, inflation, and other macroeconomic factors may limit the decline and could even cause temporary used car price rebounds.
What cars are cheapest to buy right now?
Mainstream compact and subcompact cars tend to have the most negotiable pricing right now, including models like the Hyundai Accent, Nissan Sentra, Honda Civic, and Kia Forte. However, inventory is tight for all models. Hybrids and EVs also have slightly better availability than gas-powered vehicles.
Should I lease or buy a car during the shortage?
Leasing can be a good option right now, as monthly payments are typically lower than purchasing. You’ll avoid negative equity when selling a purchased vehicle later. However, leasing inventory is still low, and you may face mileage limits. Weigh your options carefully based on your situation and long-term plans.
What strategies can get me the best car deal right now?
Being flexible on color, trim, and options can help access inventory faster. Look at dealers within a wider geographic area for more selection. Comparing quotes between multiple dealers via email rather than in person may help get lower pricing. Consider leasing, used, or hybrid/EV options to improve chances of finding an acceptable vehicle and deal.
The Impact of the Chip Shortage on the Automotive Industry
The automotive chip shortage took a heavy toll on vehicle production and sales over the past two years. Here is a closer look at how chip constraints have impacted the auto industry:
Decline in Vehicle Production
With limited chip supplies, automakers have had to repeatedly cut production. Globally, car production fell nearly 14% in 2021 compared to 2020 levels. U.S. car production dropped sharply during the shortage, from over 3.7 million vehicles produced in Q1 2020 to just over 2 million produced in Q3 2021.
Inventory Levels Down Over 60%
Tight inventory has become the norm at dealers across the U.S. during the shortage. At the start of 2022, dealers had an average of around 28 days supply of vehicles, compared to pre-shortage levels of 70-80 days supply. This has translated to nearly empty lots at many dealerships.
| Metric | January 2020 | January 2022 |
|---|---|---|
| Days Supply of Inventory | 76 days | 28 days |
| Average Vehicles per Dealer Lot | 329 units | 129 units |
Sales Hampered Despite Strong Demand
While consumer demand has been very robust, tight inventory has caused annual car sales to drop over the last two years. U.S. car sales fell nearly 15% in 2021 versus 2020. With limited options, many buyers are waiting extended periods to obtain the vehicle they want.
Record High Prices
Invoice prices on new cars have climbed over 15% during the chip crisis as automakers have cut back on incentives and rebates. The average new car transaction price hit a record $47,077 in December 2021. Used cars saw even more dramatic price increases, with prices up over 40% by the end of 2021.
Sharp Drop in Dealer Profits
Dealers have seen profits decline due to shortages. Gross profits per new vehicle fell over 20% from 2020 to 2021. Total U.S. dealership profits were estimated to have declined by nearly half between 2019 and 2021 as throughput has slowed.
Outlook for 2023 and Beyond
While chip shortages are expected to continue through at least 2023, increased production capacity at chip fabs will gradually improve supplies over the next 18-24 months. Other developments that could impact pricing and availability include:
Improved Chip Allocations
Automakers are working closely with chip suppliers to increase allocation of constrained components. Prioritization of high-demand, high-margin models may provide some inventory relief.
New U.S. Chip Production
New semiconductor fabrication plants being built in the U.S., including the $20 billion Intel facility in Ohio, will boost long-term supply when operational later this decade.
Changing Consumer Preferences
As prices stay elevated, some lower-income buyers may shift to the used market, reducing demand pressure on entry-level new vehicles.
Increased Production in 2023
Most major automakers expect to produce 5-10% more vehicles in 2023 compared to 2022 as chip availability incrementally improves.
Strategic Stockpiling
Building buffer chip inventories and securing supply commitments from alternative chipmakers could mitigate future disruptions.
Lower Sales to Rental Fleets
Automakers have slashed fleet sales during the shortage. As supplies recover, selling more vehicles to rental companies could help stabilize high used prices.
Conclusion
The global chip shortage has been an unprecedented disruption to the auto industry that will have lasting effects. New and used vehicle prices have skyrocketed and will remain elevated through at least 2023 until inventories can rebuild. However, increased chip fabrication capacity coming online over the next two years should gradually improve supplies and pricing. Automakers are also adapting their strategies to make their chip supply chains more resilient. While the shortage has been a difficult period, the industry is poised to recover over the long-term as production volumes pick back up.
