When Will Used Car Prices Drop?

Even though the COVID-19 pandemic feels like ages ago, its impact is still being felt in almost every industry. And that’s especially true of the automotive market. Since the onset of the pandemic, used car prices have been on the rise, leaving many people wondering when the prices will drop. The result is confused consumers wondering when it makes sense to make a purchase.

While used car prices declined throughout 2022, we’re once again experiencing a rise. Used car prices increased by 4% during a two-week period in mid-February¹. Increases happen, but this rate in such a short period of time is uncommon. Let’s dig into what this can mean for your business and customer base.

Why Are Used Car Prices Going Up Again?

Inventory Fluctuations

There are several reasons for the recent increase in used car prices. To start, dealers began to cut down on used car inventory as prices declined during the final quarter of 2022 and the first month of 2023². This was the result of an increasing number of new cars becoming available. 

The semiconductor chip shortage of 2021 forced automakers to reduce production well below the current demand for new vehicles³. Prospective new car buyers turned their attention to the used car market as an alternative. With that, new car prices increased due to a lack of supply, and used car prices increased due to a spike in demand.

Strong Labor Market

As the labor market improved in 2021, the demand for new cars increased as more people needed to commute to work and could afford to purchase a vehicle⁴. A strong start to the 2023 job market means demand for cars is likely to increase, but inflation affects how much people are willing and able to pay for vehicles, even if they’re shopping for a used car or truck⁵.

Low Supply

Reporting from 2021 shows that cars around two years old made up a sizable portion of the used market. Simple math means that, in 2023, vehicles in this age range would have been built between 2019 and 2020. New car production ground to a halt, with roughly 11 million fewer vehicles produced³ and buyers snapping up whatever inventory was available on the used market. These supply challenges will take time to resolve, affecting wholesale and retail prices in the meantime.

What Should Auto Dealers Prepare For in 2023?

Seasonal Market Improvements

With the summer months quickly approaching, car buying season is almost here. Improved weather and buyers with tax refunds generally lead more people to car dealers. Not only that, but research from J.P. Morgan indicates that supply chain problems and inflation could keep improving in the weeks ahead⁶. The firm has their sights set on May as a significant month for would-be car buyers. With that, dealers have one thing on their minds: rebuilding inventories to meet the needs of their customer base. 

Eager buyers might give your sales team reason to be optimistic, but there’s a catch: Every dealer will be looking to restock their lots with desirable vehicles, driving up prices. 

Shifting Consumer Mindset

The influx of electric and autonomous vehicles will also impact the used car market. EV technology is changing the way people think about car ownership, since we don’t yet have data about value retention over time⁷. The prices of new EVs have changed dramatically as the technology became more prevalent and businesses grappled with pandemic-era constraints.

One key takeaway? The rise and fall of fuel prices can affect used cars with both electric power systems and traditional gas engines as consumer demand shifts.

While it is unlikely that used car prices will drop significantly in the short term given broader economic trends, there are some signs that the market may stabilize in the long term.

Citations

1. Wholesale Used-Vehicle Prices See Large Increase in February. Cox Automotive. Retrieved on March 22, 2023, from https://www.coxautoinc.com/market-insights/february-2023-muvvi/
2. Boudette, N. (31 January 2023). The Pandemic Used-Car Boom Is Coming to an Abrupt End. New York Times. Retrieved on March 22, 2023, from https://www.nytimes.com/2023/01/30/business/economy/used-cars-carmax-carvana.html
3. Walsh, D. (21 June 2022). How auto companies are adapting to the global chip shortage. MIT Sloan School of Management. Retrieved on March 22, 2023, from https://mitsloan.mit.edu/ideas-made-to-matter/how-auto-companies-are-adapting-to-global-chip-shortage
4. Increased new-car demand during pandemic has U.S. industry optimistic about 2021. Reuters. Retrieved on March 22, 2023, from https://www.reuters.com/article/us-usa-autos-sales/increased-new-car-demand-during-pandemic-has-u-s-industry-optimistic-about-2021-idUSKBN29A1RY
5. Measuring Price Change in the CPI: Used Cars and Trucks. U.S. Bureau of Labor Statistics. Retrieved on March 22, 2023, from https://www.bls.gov/cpi/factsheets/used-cars-and-trucks.htm
6. Fragassi, S. (6 March 2023). May Is the Best Month to Buy a Car—Here’s Why. Yahoo! Life. Retrieved on March 22, 2023, from https://www.yahoo.com/lifestyle/best-month-buy-car-2023-231008486.html
7. Vincent, J. (27 January 2023). What Is the Value of Used EVs? It’s Hard to Say. U.S. News & World Report. Retrieved on March 22, 2023, from https://cars.usnews.com/cars-trucks/features/resale-value-of-electric-vehicles