Used-car shoppers, brace yourselves: It’s sticker shock time. Imagine wanting to buy a used car only to find fewer available for sale. So, not only do they cost more, but high interest rates on car loans make them even more expensive.
Consumers searching for a used car will face more significant challenges ahead. After months of tumbling used car prices, they began inching up at the end of the summer. A troubling trend could inflate used car prices into 2027, an analysis of Cox Automotive data shows.
A mixture of forces collided to form a massive shortfall of used vehicles, everything from COVID-19 shutdowns and shortages to economic impacts. Additionally, too few available off-lease vehicles are tightening an already lean market for used cars.
This predicament will affect you if you plan to purchase a used vehicle. Here’s what to expect.
Causes of the shortage
How did we get here? Blame it on several things, mostly related to the COVID-19 pandemic. United States carmakers manufactured 8 million fewer vehicles than usual during 2020 and 2022. They shut down or slowed production. Lower production means 8 million fewer vehicles will reach the used car market today.
Supply shortages, including the lack of microchips required for a vehicle’s high-tech features, stalled most manufacturing assembly lines, like Kia’s West Point facility. As pandemic restrictions eased, consumers rushed to buy new and used vehicles, and carmakers couldn’t keep up with the pent-up demand.
Credit: SPECIAL
Credit: SPECIAL
Those factors pushed up new car prices, which triggered skyrocketing used car prices.
Another critical factor inflated used car prices. In the frenzy to buy, consumers saw fewer vehicles available for lease from 2020 to 2022. Additionally, when car leases ended, many consumers opted to purchase the cars coming off-lease instead of turning them in. This strategy was a smart money move since the residual values had been calculated when cars cost less. That trend continues today, leading to fewer used cars, says Jeremy Robb, senior director of economic and industry insights at Cox Automotive.
“We’re seeing the impact today from the lower new vehicle production and sales from three years ago,” Robb says.
Robb added that carmakers used to lease 32% of their vehicles. Since the pandemic, that number has dropped to about 25% to 26%.
He said the industry expects 3 million cars this year with lease maturities, down 11%. However, fewer lease maturities are scheduled in 2025 and 2026 at 2.5 million and 2.7 million, respectively.
“It’s another big step down in 2025, and we’ll recover very little in 2026,” Robb said. “That impacts the supply situation of used cars.”
It could be 2027 before the supply of used cars builds up enough to substantially lower prices.
Effects on used car prices
The lack of supply has put pressure on used car prices. Consumers watched as used car listing prices shot up more than 27% in 2021, from about $22,000 to more than $28,000 that year, according to a Cox Automotive analysis of vAuto Live Market View data.
Earlier this year, used car prices slowly decreased before leveling off at the start of summer. Now, average used car prices are rising again, up to $25,415 in July — $164 higher than in June, or an increase of about 0.6%.
Another key indicator for used car pricing shows a sea change coming this fall. Dealers paid more for used cars at auctions for the first time in months. The Manheim Used Vehicle Value Index, which tracks these prices, increased in August. Since it takes six to eight weeks for the impact of higher auction prices to trickle down to consumers, used car shoppers will see higher prices as soon as October. The parent company of the Atlanta Journal-Constitution owns Cox Automotive and Manheim.
Impact to consumers
With little relief in sight for consumers hoping to buy a cheaper used car, there’s a smidgen of hope for auto loan borrowers. If the Federal Reserve lowers its benchmark rate in mid-September, that could help. However, any relief for used car loan interest rates may take until December.
The question then becomes, will there be a substantial difference for shoppers needing auto loans? Dealertrack, a Cox entity tracking new and used car loan interest rates, reported that interest rates on used vehicles increased to 14.15% in August. Lenders had already tightened standards for used car loans, which typically bring more risk. They may not be willing to lend money at lower rates with lingering economic uncertainty. It’s a wait-and-see.
On a recent Wednesday, a Nalley Automotive van roamed Decatur, emblazoned with the phrase, “We Buy Cars for $1,000 More than CarMax.” It’s not uncommon to see signs saying, “We buy used cars,” outside dealerships.
So, for now, a consumer with a popular vehicle can get a great deal when they trade in their used car. Let’s hope it’s enough to take the sting out of your used car buying balance sheet.
Renee DeGross Valdes is a veteran reporter and editor who writes about car advice for Kelley Blue Book and Autotrader. She previously worked for CNN and The Atlanta Journal-Constitution.
The Steering Column is a weekly consumer auto column from Cox Automotive. Cox Automotive and The Atlanta Journal-Constitution are owned by parent company, Atlanta-based Cox Enterprises.
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