When will car prices drop?

A woman stands in between rows of new cars in an auto dealership showroom.Image: A woman stands in between rows of new cars in an auto dealership showroom.

In a Nutshell

Auto prices are sky high due to the current car chip shortage. But when will car prices drop? Here’s some guidance on what to expect in the months and years ahead.
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Saying car prices have gone through the roof over the past couple of years is no exaggeration.

Automakers need semiconductor chips to support electronics in modern cars. Unfortunately, there’s an ongoing car chip shortage, and it has played a significant role in increased prices. According to Kelley Blue Book, the average transaction price for a new vehicle was $45,927 in March — up $5,247 from the same time last year.

Significant supply-chain disruptions have affected car values and the production of new cars. So, when will car prices drop? It’s difficult to answer with certainty, but we’ll review some of the factors below — and give some tips for buying a car in this market.

Are car prices expected to drop soon?

The average transaction price for a new car has edged lower over the last few months. After hitting an all-time high of $47,064 in December 2021, average transaction prices have declined for three straight months — hitting $45,927 in March, according to Kelley Blue Book. But despite the easing, prices remain high.

Global supply chain disruptions could make it difficult for inventory levels to rebound.

Why are car prices so high?

Two developments bear much of the blame for high car prices: the semiconductor shortage and the COVID-19 pandemic. Semiconductor chips are used in a wide variety of products. For example, they govern the electronics found in your car as well as products including cellphones, TVs and internet routers.

Even before COVID-19, there were already supply problems in the semiconductor industry. Chipmakers had difficulty sourcing parts to assemble the chips electronically, including capacitors, substrates and diodes. And demand for semiconductor chips was on the rise, fueled by a growing appetite for semiconductor-intensive products such as electric vehicles.

When COVID-19 shut down factories, supplies plunged and auto prices soared.

The consumer price index indicates new car prices are up 12.5% over the past 12 months based on March 2022 data. What may be even more surprising is how the car chip shortage has affected prices at the used-car lot. Used vehicle prices have risen by 35.3% in just one year.

So what’s responsible for the steep increase in used car prices? It’s simple: As new cars become more expensive and less accessible, buyers turn to the used-car market. The increased attention has driven prices upward.

Tips to buy a car

Here are some strategies that may help you get a reasonable deal for your situation when shopping in today’s challenging car market.

  • Shop around. The supply of new cars may vary from dealer to dealer. Contact more than one dealer to see if you can get the vehicle you want at the best price possible.
  • Make a down payment. Things can get competitive once a vehicle hits the lot, and you may lose your desired car to another shopper. Putting a down payment on the vehicle you want allows you to reserve your car before it arrives at the dealership.
  • Consider more than one model. If the model you want is unavailable or overpriced, consider another model with similar traits. For example, if you were looking to buy a Toyota RAV4 compact SUV, consider a similar model in the same category, such as the Honda CR-V.
  • Be flexible on color and options. Because of limited inventory, the colors and options you want may not be available. If you allow for some flexibility, you’ll open yourself to a broader range of choices.
  • Take a minimalist approach to trims and options. Car prices are high in the current market. Consider cutting back on nonessential options or choosing a less lavish trim to save money.
  • Widen your search to get the best deals. The dealership with the best car for your needs at the best price may be hundreds of miles away, so it’s good to widen your search when shopping online. Some dealers simplify this type of long-distance shopping by offering home delivery.

What’s next? Waiting could be the best option.

Waiting to buy could be the smartest move for car shoppers who don’t have a specific and immediate need for a vehicle purchase. The semiconductor chip shortage will likely end in time. As a result, new-car production could return to normal levels, and car prices could become more reasonable. Delaying your purchase could be the best route to take from a financial perspective.

About the author: Warren Clarke is a writer whose work has been published by Edmunds.com and the New York Daily News. He enjoys providing readers with information that can make their lives happier and more expansive. Warren holds a Bac… Read more.