Think Used Car Prices Are High? Chip Shortages Are to Blame

It’s basic economics

An oversimplification of the laws governing general commerce suggest that supply and demand dictate prices.
High supply and low demand? Prices fall.
Low supply and high demand? Prices go up.
This, of course, doesn’t take into account the Federal Reserve printing trillions of dollars and dumping it into the economy, but that’s an entirely different topic for another day (and written by someone who’s not me).

If you’ve been in the market for a car lately, or you’re like me and you’re always in the market, you may have been hit with a bit of sticker shock. Up 21% year-over-year, used cars have attracted a premium in this pandemic-ridden market, and consumers have surprisingly been in a buying frenzy. In some instances, used cars have been selling for more than when they were new; so what’s the logic behind all this madness? Turns out, silicon is mostly to blame (no, not that silicon).

All dips and no chips

Along with the pandemic came one of the greatest surges of the market in Wall Street’s history. Many stocks plunged at the onset of COVID, but then began to rapidly erupt to all-time highs soon after. New investors caught wind of the “free money” and jumped in, shooting prices even higher than anyone ever could have anticipated. The result? Millions who had previously stashed their cash in stocks multiplied their savings. The government handing out stimulus checks fed into this as well, with spikes in stock prices correlating with checks getting into people’s hands. “Buy the dip,” became a popular saying amongst these new investors, giving rise to a new meme-driven market. Although a lot of this newfound money was spent on necessities, much of it was also spent on luxuries (let’s be real, most people can’t live off of $1,200).

That nice watch you’ve always wanted?
Within reach.
That home project you’ve been waiting to start?
Supplies ordered.
That PlayStation 5 you had your eye on? Ok, maybe not this one. They’re not available anywhere, and it’s for the same reason used car prices have exploded: microchips.

The modern automobile is just as much computer as it is car. Everything from the safety systems to infotainment to the ECU require semiconductors to work. With COVID-19 globally surging on-and-off like a light switch, staff at semiconductor foundries have been unable to regularly go to work. What little chips that are produced are held up at the shipping ports, who have had their own series of tight restrictions and closures due to COVID. The work-from-home and study-from-home movements have also exacerbated the chip shortage by suddenly increasing demand for devices that need semiconductors. A perfect storm of chip pandemonium was upon us, leading to fewer new cars being produced; and thus, higher used car prices. 

We’re not out of the woods yet 

Japan’s Rohm Co. – semiconductor supplier for Honda, Toyota, and Ford – has warned that we may continue to see the chip shortage throughout next year. Isao Matsumoto, CEO of Rohm Co., has stated that their production facilities have been running full steam since September of 2020, but they still struggle to meet demand. He goes on to say that, “I don’t think we can fulfill all the backlog of orders next year.” With so many globally-sourced parts that go into cars these days, one missing component can totally shut down production lines.

The digital era we live in also continues to strain semiconductor foundries. Recent leaks out of Taiwan Semiconductor (TSMC), the world’s largest chip foundry, indicate plans to raise prices by about 10% for most advanced chips, while less advanced chips (aka those used by automakers) will see a 20% price hike (yay us). This price increase will no doubt transfer to consumers, leading to more expensive new cars all around. 

So what is an enthusiast to do? 

I’m not here to tell anyone what to do with their money, and God knows being a car enthusiast is furthest from being a sensible spender, but enthusiast cars tend to ride a wave of their own when it comes to pricing.

Many icons, including previously disposable cars like my AE86, have shot up in value during the pandemic – but I think they would have gone up anyway. “Special” cars usually follow a similar trend of depreciating for years after the new sale, eventually plateauing, then steadily rising (sometimes rocketing like air-cooled Porsches) when nostalgia kicks in or the car isn’t being produced anymore (à la the Evo X).

As more cars become less involving to drive (and ironically faster, safer, and more efficient), cars from the “good old days” become more desirable. They don’t make them anymore (or like they used to), so the basic principles of supply and demand kick in. All those drift missiles Leeroy Jenkins’d into walls at racetracks have only reduced supply. Movies like The Fast & the Furious and popular anime like Initial D have shot some Japanese car values into the stratosphere by increasing demand. See where I’m going here? Classic car values rarely ever go back down after they’ve already gone up, so the time to buy is always now (if you have the means) – at least that’s what I tell my therapist.