Pent Up Car Demand Still Needs New Inventory

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By now you have heard all about the shortage of new cars thanks to manufacturers not being able to get their hands on semi-conductors. You have been well briefed on how quickly used car prices are rising. Well, the latest news out of the automotive industry is speculation that pent-up demand will drive new car sales up in 2022. That is all well and good, but pent-up demand still needs new inventory to satisfy it.

Edmunds is among those industry experts predicting increased new car sales in 2022. They are looking at a potential 1.2% increase over their 2022 estimate. Why the boost? They say that consumers have a pent-up demand that has not been met thus far. Edmunds is convinced that buyers will take to dealer lots in 2022 in higher numbers.

The question is whether dealers will have the inventory to make consumers happy. And on that front, things are not looking so rosy. Automakers still cannot get the semi-conductors they need. Things are so bad that the Biden administration is looking to spend billions in hopes of bringing semi-conductor manufacturing back to the States.

A Direct Result of Lockdowns

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It is safe to say that most of what is driving the new car industry right now is a direct result of coronavirus lockdowns. What was supposed to be a 15-day pause to flatten the curve would eventually become nearly two years of nervous hand wringing. Automotive factories were shuttered for a good portion of last year, bringing new inventory to a standstill. And when factories did begin reopening, they did not go full production.

Meanwhile, lockdowns in Taiwan put the kibosh on the semi-conductor market. It turns out that the vast majority of semi-conductors utilized by automakers are manufactured in Taiwan. If that country is not working at full capacity, they are not producing semi-conductors at full capacity.

If all of that weren’t bad enough, we have a bunch of world leaders who revert to panic mode every time someone mentions a new coronavirus variant. The Omicron variant (at the time of this writing) is just the latest to cause politicians and bureaucrats to consider clamping down once again.

Perhaps automakers could have gotten their production lines up and running at full speed with the turn of the calendar had Omicron not appeared. But now it’s here. No one should be surprised if new coronavirus restrictions once again slow the pace of semi-conductor manufacturing. And if that happens, new car production will stall yet again.

It’s a Supply and Demand Thing

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In terms of how all of this affects new car buyers, it is really a supply and demand thing. Any pent-up consumer demand that does exist is a direct result of 2022 new car sales being limited by inventory shortages. You can see with your own eyes. Drive past a few dealers in your town and you’ll probably notice that their lots look very sparse. They cannot sell cars they don’t have.

Fill those lots back up and new car buyers will come out to buy. At least that is what Edmunds and a few other experts are saying. Let us give them the benefit of the doubt and assume their assertions are correct. So what? We are still left with the specter of supply-chain problems.

All that pent-up consumer demand will remain unmet if manufacturers do not pump out enough new cars to adequately boost supplies. Without increased output, dealer lots will remain sparsely populated. Furthermore, there are only so many used cars to go around. If people cannot buy new, they are not going to trade in what they are currently driving.

Selling for Big Bucks

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Not all the news in the automotive sector is bad. In fact, the current environment is quite good if you are looking to sell a used car. Used car prices have increased more than 30% over the last 12 months. Furthermore, demand is so high that dealers are willing to pay premium prices for a late model car that is in good condition.

According to Car Fast Cash, a cash for cars business that purchases used cars in Orange County, San Bernardino County, and throughout Southern California, competition in their industry has heated up quite a bit over the last year. There are now more companies doing what Car Fast Cash has done for years. There are more online and app-based businesses as well.

It all adds up to tight competition for a limited number of used cars. In essence, this is the time to consider selling if you have a used car that you don’t really need anymore. If expectations of a stronger new car market play out in 2022, used car prices could stabilize or even fall. That means you might not get as much for your used car in the summer of 2022 as you could get for it today (December 2022).

A Lesson in All of This

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Regardless of whether Edmunds’ prediction for 2022 holds true, there is a lesson to be learned in all of this. Unfortunately, it is one that will be ignored by most people. What is that lesson? Government dictates have consequences. Governments unilaterally shutting down businesses affect local, regional, and national economies in the short term. But those effects tend to continue long after shutdowns ease.

Anyone who possesses even a marginal understanding of business and economics could have predicted the supply chain issues and runaway inflation now being experienced around the world. The global economy requires companies to be so interdependent that shutting down one supply line affects nearly every other supply line to some degree.

None of this needed to happen. None of it should have happened. Yet here we are, with used car prices spiraling out of control and no realistic expectation of new-car inventories stabilizing. Edmunds believes that new-car sales will increase due to pent-up consumer demand in 2022. But that’s not going to happen if inventories are not boosted. That is the way this works. It takes two to dance, even in the automotive industry.