Vehicles are not only modes of transportation; they are also financial investments. There’s a common saying that new cars lose a quarter of their value as soon as you drive them off the lot, and this saying is relatively accurate. Research indicates that the average car depreciates by 23.5% during the first year of ownership.
As a result, many people have been hesitant to shell out the money for a brand new car, knowing that, in all likelihood, the vehicle is going to lose a great deal of value within the first year or two of ownership. But with this line of thinking, why aren’t four or five-year-old cars going for half the price of this year’s model?
The short answer to this question is that it’s a combination of market forces and the Coronavirus. For further detail, let’s take a look at how we got here and why used cars are still so expensive.
Even under the best of circumstances, it’s common to see some fluctuation in used car sales from year to year. But since the beginning of 2020, prices have been consistently on the rise. By the summer of last year, the average cost of a used car had risen to a record high of $21,558. To the surprise of some, prices have only increased since.
Though used car costs continue to rise, it’s still not impossible by any means to find a good deal. If you’re open to various options, there are still plenty of affordable used cars to fit your needs and budget. However, if you’re particular about owning a specific make, model, or color, you’ll most likely find yourself paying a premium in the current market.
The used car market depends on a regular supply of vehicles, and under normal circumstances, this isn’t a problem. People are continually selling their cars to buy a new one, or their lease ends and the vehicle is sold. Rental cars also contribute a large percentage of used cars as they replace old fleet vehicles with new ones.
But when consumers aren’t buying new cars, they’re holding on to their old ones. As a result, fewer used cars are available for sale. Without a healthy market for new car sales, the used car supply dries up, and the cost skyrockets due to this reduced inventory. This is precisely what we’re experiencing today, as the COVID-19 pandemic has impacted the used car market primarily in two ways.
First, supply chain shortages have forced manufacturers to produce fewer new cars, driving up the cost and discouraging people (many of which are suffering from financial hardships) from buying new vehicles.
Simultaneously, record levels of unemployment and financial anxiety have encouraged people to buy used rather than new, or simply keep their old car for now until the economy has stabilized.
These two factors significantly contribute to one singular result: fewer used cars are now available, and more people are lining up to buy them. You don’t need a degree in economics to understand that less supply plus more demand creates higher prices.
The good news about the Coronavirus impact is that it appears to be temporary. Supply chain conditions have already improved for new automakers. And as people’s lives slowly return to normal, so will their spending habits. It’s unlikely to see used vehicle costs drop to their pre-COVID levels, but today’s inflated prices are unlikely to become the new normal.
The Pandemic Response Contributed To The Price Increase - Find the best car deals!
The response to the pandemic by both governments and businesses has also contributed to higher used car prices.
When the IRS distributed stimulus checks to Americans, they anticipated that most people would spend the money catching up on rent and overdue bills. Indeed, millions of struggling Americans used their checks to dig themselves out of a hole. But millions more spent theirs on home appliances, exercise equipment, and even used cars.
According to J.D. Power, Detroit used car sales were higher last year than those of 2019, despite the pandemic, and the Detroit metro area was experiencing one of the worst COVID-19 infection rates in the country. The lockdowns that resulted are perhaps the explanation for all these used car sales, with the state of Michigan ranking 9th among all states for Economic Impact Payments received.
Meanwhile, some states have tried to offer their residents a helping hand by suspending car repossessions. Even private businesses have gotten on board, with many banks offering temporary deferrals for borrowers impacted by the Coronavirus who are otherwise in good standing.
Typically, banks will repossess a car after one or two missed payments. However, during these trying times, 90 and 120-day deferrals have become the norm for most brands. While this is a welcome sight of aid to Americans in need, it also means there are fewer repossessed cars ending up on auction blocks. Though many hard-working citizens were able to keep their cars, this lack of vehicles worked to drive up the cost for used car dealers to purchase new inventory.
It remains to be seen what effect these policies will have going forward. But barring any extensions, all state and private deferral programs are slated to end by the beginning of August. It’s possible that late summer and early autumn could bring a windfall of repossessed vehicles and a corresponding drop in used car prices.
On the other hand, additional stimulus payments are on the way. Congress is poised to deliver an additional payment of $1,400 to every American before tax day. If a high number of consumers use these checks as car down payments, prices could potentially be even higher than those witnessed in 2020.
Another contributing factor to the rise in used car prices has nothing to do with the Coronavirus. While this is refreshing in many ways, it also means that it’s not something that will dissipate once the pandemic ends.
Simply put, new cars are getting pricier, and as new car prices rise, so do those for used cars.
There are several reasons that new car prices are on the rise. Some of those reasons are purely structural. Modern, high-strength steel frames are lighter and safer in a collision than older structures. But this advanced technology comes at a higher cost. Cars have also gotten larger, increasing the amount of raw materials required for their production.
Other reasons are regulatory. For example, many countries around the globe are raising their vehicle emission standards and those for the factories that produce them. Manufacturers needed to invest millions or even billions of dollars in research and development to meet this challenge, which made their cars more expensive.
Finally, new cars are simply better equipped than older models. A fully-loaded modern vehicle may have surround sound, a motorized hatchback, heated seats, LCD monitors in the seats, a GPS, collision avoidance, and parking assistance. All of these systems cost money, and some of them are actually very expensive still.
We can expect these trends to continue for the foreseeable future, as even after the pandemic has passed, used car prices are likely to continue rising. This should happen relatively slowly, however, and last for a moderate period of time. The current pandemic-related spike is just an anomaly. Regardless, the advanced technology features, increased production costs, and pandemic-related inventory issues should keep the prices of used cars at a modest ascension for years to come.
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