Get Used to High Used Car Prices

A shortage of second-hand vehicles is preventing prices from returning to pre-pandemic levels

By Kendall Polidori

Today’s sky-high used car prices can’t last forever. Experts expect a reset—but at a level still painfully higher than before the pandemic.

“There’s talk about prices declining,” confirms Charlie Chesbrough, senior economist at Cox Automotive, a company with multiple brands in the automotive industry, including Autotrader and Kelley Blue Book.

But don’t get overexcited. “It seems very difficult to see them shifting anywhere back to where they were pre-COVID,” Chesbrough warns.

How bad has it been? Well, the average price of a used vehicle sold by a new-car dealership leaped from $21,210 in 2020 to $30,800 in 2022—an astounding 45% increase, according to the National Automobile Dealers Association.

Place the blame for the rocky used-car market at least partly on what’s been happening with new cars, Chesbrough said. Pandemic-induced microchip shortages limited production, thus raising prices for the few vehicles manufacturers managed to build. Many new cars sold for more than their sticker price—a nearly unprecedented trend.

“The industry is trying to come back from a very difficult couple of years with very lean inventories,” he said “There’s a lot of folks out there that wanted to buy vehicles but haven’t been able to because of the chip shortage.”

High prices for new cars drove many consumers to consider buying used vehicles. The increased demand for second- or third-hand cars naturally drove up prices in the pre-owned market.

What’s more, the limited selection of new vehicles also encouraged shoppers to turn to used vehicles for the options and features they wanted. Why settle for a new rear-wheeldrive SUV in the wrong color when the perfect one-year-old all-wheeldrive version was available?

Inflation in the overall economy didn’t help matters, either. Rising interest rates also muddled the market. And don’t forget that car dealerships were suffering from the shortage of workers that plagued nearly every sector of the economy.

Dealers readily acknowledged the situation. Fifty-three percent of them cited the economy as a leading factor in the market, according to Cox Automotive.

But a bit of relief from high used-car prices may be on the way.

A price turnaround?

Used-car prices apparently reached their peak in January 2022, a Bloomberg report said. They then fell 16% by the end of last year and could decline another 20% this year, according to the news service.

CoPilot, a service that helps consumers make car-buying decisions, put it this way late last year: “Prices are now $8,497 (or 34%) above projected normal levels, a premium that fell by a staggering 9% from July.”

Prices are easing, Chesbrough agreed. “We’re starting to see that the air is being let out of that bubble, and the prices are starting to come back down to earth,” he told Luckbox

Yet, challenges remain.

The depleted inventory of used cars will continue to keep prices high, Chesbrough said.

“We’re still a market that just does not have enough product out there for the people who need personal transportation,” he noted.

Besides the lack of new cars, Chesbrough is seeing a slump in new-car leasing, which has been a significant source of vehicles for the used-car market. That weakness could last through 2025, he said.

“Normally about 30% of all retail sales activity are a lease, but that’s fallen to just about 20% so far in 2022,” Chesbrough said.

About 2.5 million fewer leases will end every year for the next three years, robbing the used marketplace of that inventory, Chesbrough maintained.

Until now, about 65% of lease customers turned their vehicles back in at the end of the lease. The leasing firms then sold the vehicles at wholesale auctions open only to certified car dealers.

These days, however, consumers who lease vehicles are often exercising their option to buy them at the end of the lease. They’re doing it because the buy-back price agreed upon at the beginning of the lease tends to be much lower than the current pandemic-influenced value.

So, there are headwinds in the used car business, as Chesbrough puts it. Prices are declining a bit now, but limited inventory may soon start another round of price increases.

Let’s look at some actual figures.

Illustration by Connor Grady

Valuable Vehicles

Depreciation still begins when you drive your new car off the lot, but vehicles are holding their value better now than in the past.

"Overall five-year depreciation for new cars dropped from 40% in 2021 to 33% this year," according to iSeeCars, and automotive search engine and research website.

Jeep Wrangler ranks best for holding value, iSeeCars said. Fuel-efficient hybrids and compacts also tend to decline the least. Large luxury cars. such as the BMW 7 Series, lose the most value.

Running the numbers

Although used-car prices remain high, they’re not flagrantly overvalued because their quality is at least as good as it’s ever been, Chesbrough said.

“They’re going to last for 10 years plus,” he said of today’s cars, “and maybe the market actually caught up to what the true value of these vehicles are.”

Photo from Getty Images

More specifically, a 12-year-old vehicle that would have sold for $3,700 at a wholesale auction before the pandemic would now bring $6,700, Chesbrough noted.

But for many consumers, the size of their car payment can overshadow concerns about the price, Cox Automotive Chief Economist Jonathan Smoke maintained in an article.

"A $400-a-month car payment is an important target for many mainstream households, as it would consume 10% of the gross income for a household with $50,000 in income," Smoke said.

Americans are keeping their cars longer. Average

That places new cars out of reach for a family living on a tight budget. The payment on a Chevrolet Spark—a tiny, plebeian mode of transportation—would come close to the $400 goal, but adding taxes, tags and title would put it out of reach.

Plus, setting aside the cash for a down payment could prove challenging for consumers already struggling to keep food on the table during inflationary times.

On a side note, Chesbrough credited the price increases with changing the way people view the vehicles they already own. They value them more and have become more likely to invest in repairs to keep them on the road instead of replacing them.

“We’ve just changed that equation much more in favor of keeping those vehicles for a longer time,” he said. “And I think it does suggest that used vehicles are going to hold their value longer.”

Perhaps squeezing a few extra miles out of that old beater in the driveway makes sense right now, experts said.

Photo from Getty Images

Average retail selling price of used vehicles sold by new-vehicle dealerships, by year, June YTD

In Thousands of Dollars

The buying decision

With prices high and selection limited, postponing a purchase only makes sense in many cases, according to Chesbrough. “It’s not the best time to buy or sell a vehicle,” he noted.

Still, there’s no wisdom in throwing good money after bad in an ill-fated attempt to keep a clunker out the auto graveyard. But if trading up becomes inevitable, car industry mavens advise modesty.

Instead of investing heavily in the hefty SUVs and enormous pickups that dominate the streets and highways, consumers would be wise to buy small cars, midsize sedans and hatchbacks, according to auto retailer CarMax.

Count on American motorists to go their own way, just the same. As Chesbrough put it: “People want personal transportation, and they’re willing to pay for it.”

HIGHER-INTEREST AUTO LOANS AHEAD?

So far, rising interest rates haven’t stopped Americans from taking out car loans, but it could still happen.

“If you look at vehicle sales in both the new and used markets, they haven’t really changed—they have not been disrupted by rising interest rates,” said Charlie Chesbrough, senior economist at Cox Automotive, publisher of Autotrader and Kelley Blue Book.

However, the current strong demand for vehicles could weaken, possibly because of the high cost of borrowing.

As Luckbox was going to press, interest rates averaged 4.07% for new car loans and 8.62% for used cars, according to Car and Driver magazine.

“The issue the industry is now dealing with is whether these interest rates are going to take away people’s ability to afford these vehicles,” Chesbrough said, adding that “their desire for them remains strong out there.”

The interest lenders charge for car loans is tied to the federal funds rate set by the the Federal Open Markets Committee. It raised the target for the funds rate to 3.75% to 4% last year, up from 0.08% in 2021.

Additional increases seem likely in an attempt to curb inflation, observers agree.

USED-CAR PRICES BY THE NUMBERS

The average price for used vehicles purchased at franchised new-car dealerships in September 2022 was $31,025, according to the J.D. Power research firm.

That was “roughly flat compared to August 2022 but represented an increase of 7.2% compared to September 2021,” researchers said.

But trade-in values have also climbed, said a joint forecast report from J.D. Power and LMC Automotive, a forecast provider. Average trade-in was an estimated $10,381, a 49.2% increase from a year ago.

Meanwhile, new cars are depreciating more slowly. The average fiveyear-old car lost 33.3% of its value from its manufacturer’s suggested retail price, a 17% decrease in depreciation compared to 2021, researchers at iSeeCars found.