Due to the Covid-19 Pandemic, the car market has experienced more disruption in the last three years than during the World War II production shutdowns. Nevertheless, 2023 is anticipated to be a period of relative steadiness, although it will not resemble the past. Supply chain issues should improve, leading to an increase in the availability of new vehicles, which should reduce the pressure on the prices of older used cars. Both new-vehicle markups and used-vehicle wholesale prices have decreased since their highs this spring, and these falling prices are beginning to be seen at the retail level. This could bring some relief to those who are struggling to afford used cars due to inflation. Interest rates are increasing, making auto loans and leases more expensive. This could mean that buying a new car in 2023, with relatively lower rates, would be more cost-effective than buying a used car that is 2-3 years old. With the potential of a recession in the first half of the upcoming year, demand is decreasing and prices are dropping. These forecasts are explained in more detail as follows.
Growing Electric Vehicles Adoption
In 2019, approximately 326,000 electric vehicles were bought in the US. According to data from Motor Intelligence, this number rose to 724,000 in the first eleven months of 2022. If not for supply chain difficulties, this number would have been even greater due to organic demand. Unresolved supply chain issues and difficulty in obtaining the necessary materials are causing the prices of new vehicles to remain high, particularly for electric vehicles.
It is also estimated that up to 3 million vehicles could be impacted by the current chip shortage in 2023, a vast majority of them being electric vehicles due to the fact that they require 30% more chips than gas-powered vehicles.
The federal subsidy of $7,500 used to be applied across the board, but it is now dependent on a variety of factors (buyer income, price of the car, and North American-based manufacturing and sourcing) instead of just sales numbers. Starting from 2023, up to 70% of the electric and plug-in hybrid vehicles that were once eligible for the tax credit will no longer get this incentive due to the strict regulations regarding battery sourcing and price caps on vehicles.
High gas prices, the appeal of low energy costs, and the release of new electric vehicle models could inspire more people to purchase their first EV; or opt for more fuel-efficient hybrids and plug-in vehicles. If high gas prices happen in 2023, this trend is likely to be even more accelerated.
An expected decrease in the price of pre-owned cars
Used vehicle prices experienced a dramatic spike in early 2022, but have since subsequently declined and they are expected to keep decreasing in 2023. Moreover, vehicles that are older than four years will experience a steeper fall than those that are between one and three years old. The chip shortage has caused new car prices to remain high, which has caused buyers to turn to used models. In 2023, it is expected that used vehicle prices may decrease to a greater extent than new ones so the prices of new and used vehicles will differ greatly.
Significant reductions in production during the pandemic and a sharp decrease in new car leasing since 2020 have resulted in there being fewer of them in the market, so prices of new vehicles will remain high. As of September, the availability of new vehicles has been increasing and is expected to continue on that path in 2023. Manufacturers are more likely to discuss reducing production and incentives when the supplies increase, which could lead to more attractive financing options for 2023 cars.
Growth of Modern Retailing
In order to stay up-to-date in the current marketplace, car dealers need to incorporate digital retailing and prioritize customer satisfaction. In 2019, traditional car dealerships began to shift towards a more online-focused approach, realizing that many customers prefer to purchase their cars online, even if they still appreciate the opportunity to test drive them. According to Automotive News, three-quarters of potential car buyers are open to making a purchase completely online, and about 65% prefer to handle the majority of their car purchases online. This has been further proven by Tesla’s digital approach to selling cars online.
Before the onset of the lockdowns, a few car dealerships had already started incorporating digital aspects into their sales operations, with some even forming complete online showrooms. After the outbreak of Covid-19, the use of these digital practices spread at a rapid rate. The pandemic pushed more car dealers to embrace and use digital platforms for their business. OEMs like Tesla, Ford, and GM also responded by creating digital portals to market their electric products online to take advantage of cutting the cost of distributing cars and having a streamlined and easier process for car buyers.
To put it in a nutshell, 2023 is expected to be a period of relative steadiness for the car market, although the Covid-19 pandemic has caused significant disruption. Prices for used cars should become more normal due to an increase in the availability of new vehicles Although interest rates are increasing, new car purchases would become relatively more cost-effective. Electric vehicle adoption is also expected to continue growing, although the federal subsidy is now dependent on a variety of factors. Besides, car dealers are increasingly incorporating digital retailing into their sales operations, allowing for easier online purchases.
Sean Toussi
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