Is the Car Pricing Bubble Going to Burst Soon?

Cars are depreciating assets, no matter what. However, given the recent car pricing bubble spawned from the Covid-19 pandemic and the global chip shortage, used car values have increased incrementally over the past year. This increase made used car buying tougher – since car prices are higher across the board – but it has also made used car selling easier as many consumers are reaping the benefits of these inflated values. But when is the car pricing bubble going to burst?

Positive equity is the name of the game right now

used cars are for sale at a dealership
Used Cars At Dealership | JIM WATSON/AFP via Getty Images

If you have an extra car and are looking to get rid of it, then you’re in luck. It’s currently a seller’s market, which means that you’ll likely be able to get top dollar for your ride now more than ever. Having positive equity in a car is the name of the game right now, but what does it mean for the consumers at the other end of the table who are purchasing these cars?

It means that they are paying thousands of dollars over what they should be for a used car, which could lead to a potential downfall in the near future. For example, Forbes used an anecdote involving a 2019 Toyota Tacoma owner that purchased his car brand new for $35,534 (MSRP: $38,641). The owner owned the truck for two years and put around 30,000 miles on it.

He then ended up selling the truck to Carvana for $32,860, only $2,674 less than he bought it for. Carvana then turn around and sold the truck for $41,900, which means that the new owner paid $6,500 over what the truck originally sold for. As we can see, the used car pricing bubble is working well for sellers, but not so much for buyers.

When will the bubble burst?

The aforementioned used car selling and buying scenario is not uncommon right now as many car buyers are forced to pay higher prices than normal. However, it’s only a matter of time before the market begins to even out and the used prices get adjust back to their normal levels.

Forbes reports that the “absurdity” should level out by next quarter as automaker production levels return to normal. And as the demand for used cars declines, cars like the aforementioned Tacoma could depreciate to half their value in the next 12 months, leaving current owners severely underwater in their loans.

According to Fox Business, used car prices were up by as much as 30% in May year-over-year, but they’re not sure when the bubble is going to burst either.

What’s going to happen if I recently bought a car?

According to Forbes, you should “brace for impact.” But on a more optimistic approach, we would suggest holding on to the car that you just bought and riding out the depreciation for the next few years. Just because you possibly paid more than you should have for a car in these current times, and it’s likely to drop in value soon, it doesn’t mean that you will get nothing for it if you sell it later.

While cars are depreciating assets, there’s a break-even point in every car’s life when its value eventually plateaus. So you’ll get some of your money back no matter what, it’ll just be less than what you would get for it now. But if you’re planning to buy a car, then we suggest waiting until next year. It’s only a matter of time before the bubble inevitably bursts.

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