Why Car Prices Are Rising in 2021

Car prices (both new and used) have risen substantially in the early months of 2021. For the first quarter, the average new car purchase price was $37,200, a number that is up 8.4 percent according to analysts at JD Power. In addition, JD Power also states that used cars sold at auctions have risen 26 percent in the first quarter of 2021. This likely correlates strongly with the substantial reduction in available cars dealers have available. So what has caused this massive hike in car prices in 2021? Let’s take a look at some of the key factors. 

What is causing car prices to rise in 2021?

There are numerous reasons why car prices fluctuate. The coronavirus pandemic has also had a strong impact on the cost of new and used cars (in addition to car parts). However, there are five commonly reported factors that have led to the drastic increase in car prices in 2021. These factors include a limited supply of used and new cars, less availability of car parts, America’s return to work in recent months, many Americans having more cash on hand, and a global computer chip shortage. 

Source: wolfstreet.com

A limited supply of used and new cars

The number one reason car prices have risen in 2021 is simply that the supply is unable to keep up with the demand. Factors such as a shutdown of car production for months in the middle pandemic and the global chip shortage (see below), there are simply fewer cars being produced than there were pre-pandemic. 

This also affects used cars as well as many who would otherwise purchase a new vehicle are now purchasing used vehicles as a means of securing a better deal and saving money during a time when there is more financial uncertainty due to the pandemic. The limited supply (and subsequently the increase in price) has also extended to rental companies, many of which were forced to sell off a significant portion of their fleet to financially survive the pandemic. 

Car parts are in a more limited supply

Not only are computer chips in limited supply, but car manufacturers and used car dealers are finding it harder to get the car parts they need. Among the list of car parts in limited supply includes tires. This makes it more challenging for auto dealers to accept trade-ins that need extensive repairs and has also slowed the rate of production of new cars as well. 

More Americans are returning to work

It is no coincidence that the rise in car prices that are approaching all-time highs comes at a time when the country (and the world) are opening back up and more people are returning to work. Quite simply, returning to work means more people need a vehicle. A large portion of the workforce that moved to work from home during the pandemic is returning to the office. Many who were temporarily out of work are finding employment. 

Many have more cash on hand than normal

More cash on hand may seem counterintuitive during a pandemic, but, according to a report by CNN, consumers have $5.4 trillion. This is expected to lead to a spending boom. In fact, the rise in car prices in the first quarter of 2021 is proof enough. The increase in savings among many consumers has to do with fewer families taking a vacation or traveling. Many are also spending less simply because their favorite stores and restaurants were shut down due to the coronavirus. Of course, there are also stimulus checks as well, which seem to have met their intended purpose in stimulating the economy. 

A global computer chip shortage

We are in the midst of a global computer chip shortage. Used in many newer vehicles, the computer chip is essential. This allows for technologies such as lane keep assist and forward collision warning to work properly. Due to the global chip shortage that has affected many of the automobile industry’s largest manufacturers, the number of new cars being produced has declined. This comes at a time when demand for a vehicle is rapidly increasing as more people are returning to work and traveling. 

What to expect in the second half of 2021

The first half of 2021 has not been friendly to the consumer when it comes to new and used car prices, but will this trend continue in the second half of the year? The answer is hard to say. Some argue that the supply will ultimately catch up to the demand, leading to a drop in prices. This is particularly in reference to the eventual resolution of the global chip shortage. As more manufacturers increase production following the distribution of the COVID-19 vaccinations, more new cars could become available.

However, those who anticipate a rise in inflation are not so optimistic. If inflation were to rise across the board in a way that affects all industries, ten prices could remain stagnant or increase further. Additionally, the global computer chip shortage could last months or years. 

How to deal with the rising car prices in 2021

The good news is car buyers have several options. The best way to deal with rising car prices in 2021 is to simply wait until prices become more buyer-friendly. In the meantime, consider fixing up your current vehicle. Fortunately, the prices of hiring a mechanic have not risen much, if any. Meanwhile the rest of the car industry has seen increased prices. 

If you do buy a car, then you can search for a good deal on used car websites such as CarGurus and AutoTrader. It may be best to find a car that is in good condition but may need some work. For example, a car with a beat-up face that needs a minor makeover. This can save you money while still allowing you to get a great car. Buying a new car is the least ideal method at this moment in 2021.