It wasn't that long ago during the pandemic when nobody was buying a car. Car dealerships were laying off salespeople, and practically no one was driving because #WFH was a reality for just about everybody (and still is for many). Zero percent interest, big incentives, and big discounts were deployed by both dealerships and manufacturers just to get folks to buy. Many dealerships also went to an online model, and manufacturers were headed in that direction, as well. But a bunch of factors has led to an altogether different situation. Car dealer lots are no longer packed with surplus vehicles. Hell, you're lucky to find what you're looking for, and it certainly won't be at the price you want.

rav4 prime
The RAV4 Prime is one of the hottest crossovers. Good luck finding one.

It very much used to be the case that you could go into a dealership and at least try to negotiate, and your chances were that much better if the vehicle wasn't in particularly high demand, like a minivan or a slow-selling family sedan. But prices are up for both new and used cars now, and this isn't just some isolated incident. New car prices have risen 8.4% on average compared to last year, according to J.D. Power's latest research

Even more disturbing is the fact that most car buyers will have to pay at or even above the sticker price found on the vehicle's Monroney. More customers, to the tune of two million car buyers, will end up paying close to sticker price this year than just a couple of years ago. This marks a significant shift in the market. Wholesale used car prices are also climbing rapidly because demand is high. This means car prices across the board have increased, and customers will have to squeeze more out of their bank accounts if they find themselves in need of a new car.

Why the Price Increase?

The big impact of something so small. Chip shortages are bringing production to a standstill (photo: ABC)

Why have things done a 180 in terms of vehicle production? Well, the worldwide computer chip shortage is largely to blame. These chips control the ECU (Electronic Control Unit) and myriad vehicle operations. Putting it simply, cars can't operate without them. Dubbed "chipageddon", the shortage stems from worldwide crises, perhaps the greatest of which is COVID-related production slowdowns (supply chain interruptions, weather-related delays) combined with excessively high demand (working from home, greater reliance on devices). 

The result has been that auto manufacturers have slowed down or even halted production, and the numbers are harrowing. New car production is down by nearly three-and-a-half million dollars in Q1 of 2021, which means supply has been drastically reduced, while demand is through the roof. People are going back to work, traveling more, and government relief during COVID also means people are spending their stimulus money on new cars. Demand is up, supply is down, and that means prices climb.

What's On the Horizon? 

This shot isn't uncommon and will likely stay that way through the rest of the year.

Carmakers have shifted gears by reserving chips for their higher-demand vehicles like trucks, SUVs, and crossovers, those cars that sell faster and generate a higher profit margin. Production of less desirable models and segments will continue to be slow. What's more, it seems that car buyers want more and more options, meaning higher prices overall for new vehicles. Manufacturers have dialed back on incentives to get people to buy, and dealerships don't have to beg or resort to weird tactics to get you in the door. The bad part is that you might not get good customer service from dealerships because you need them more than they need you.

So, if you're looking to buy a new or used vehicle anytime soon, prepare yourself to pay more than you would've last year. It's just a reality of the chip supply chain and production issue that has widespread repercussions. Dealers have zero incentive to negotiate with you because they know there's always someone else who will buy. That said, if you can wait, wait. If you can't, then be patient and hunt for the vehicle you want every day, or be prepared to make some compromises on the model and features you want.