The used car market is crazy right now. Used car prices have absolutely skyrocketed, with the average used vehicle price increasing a whopping 40% in 2021 alone!
As a young person in need of a set of wheels, you might be wondering why used cars have become so ridiculously expensive lately. There are a few key factors driving up used car prices right now. Read on to learn the top 5 reasons why used cars are so expensive in today's market.
1. Low Supply of Used Vehicles
One of the main factors behind today's inflated used car prices is low supply. The global pandemic threw a major wrench into new car production, which slowed things down dramatically. With fewer new cars rolling off assembly lines, it meant fewer fresh trade-ins hitting used car lots. This huge reduction of used car supply is a primary driver of rising used prices.
Back in 2019, around 17 million new vehicles were sold in the U.S. But in 2020, new vehicle sales dropped to only 14.6 million units. That plunge in new car sales translated to 2.5 million fewer trade-ins entering the used market, according to Cox Automotive.
On top of that, rental car companies, which typically supply a huge chunk of 1- to 3-year-old used vehicles, had to slash their fleets early in the pandemic. With travel at a near standstill, rental companies sold off more than a million used cars they no longer needed.
So between fewer trade-ins and rental car sell-offs, the overall tight supply has allowed used car dealers to drive up prices. When supply is limited and demand is steady or rising, it almost always leads to price hikes.
2. High Demand for Used Vehicles
In addition to diminished supply, used car prices are up because demand has risen substantially during the pandemic. With people wary of public transportation and ride sharing services like Uber, many opted to purchase used vehicles to avoid potential COVID-19 exposure.
Used cars have been seen as a safer personal transportation option throughout the pandemic by people from all income levels. But especially for younger buyers, used cars tend to be much more budget-friendly than brand new vehicles. With used car interest rates still at reasonable levels, buying used was enticing for a lot of first-time car owners entering the market.
On top of COVID concerns, the computer chip shortage plaguing new car production further fueled demand for used. With new car inventory constrained by supply chain issues, dealers have fewer new cars than usual, leading new car buyers to pivot to used.
Between COVID fears, supply shortages, and economic uncertainty, used cars have been in hot demand. And when demand goes up as supply goes down, you get a recipe for rising prices.
3. New Car Prices Are Up
Another reason used prices are up is that new car prices have risen substantially too. The Manheim Used Vehicle Value Index shows a strong correlation between used and new car pricing trends. When new vehicle prices go up, used car prices tend to follow the same uphill trajectory.
In 2021, new car prices rose over 10% on average, according to Kelley Blue Book. The main factors were lack of inventory, high customer demand, and supply chain problems. With low new car inventory, dealers didn't need to offer as many discounts or incentives. Limited rebates and high demand allowed them to push new car transaction prices to record levels last year.
As new car prices soared, buyers got priced out of the new market and were funneled into used. This influx of new car buyers entering the used market intensified demand and drove used car prices up accordingly.
4. Production Cuts for Cheaper Models
Another important factor is that automakers have prioritized production of their most profitable vehicles during the supply chain crisis. Brands like Toyota and Ford curtailed output of cheaper, lower-margin models to focus on producing their most lucrative trucks, SUVs, and luxury vehicles.
This led to a major reduction in the supply of more affordable, economy used cars. For example, production of the Nissan Sentra dropped by 45% and the Chevy Spark fell by 38%. With far fewer inexpensive sedans and small cars coming off assembly lines, it's been tough for people with smaller budgets to find affordable transportation.
The limited selection has allowed used car dealers to drive up prices substantially on cheaper economy models. Without as many bargains available, lower-income buyers are forced to spend more than usual or postpone their used car purchase.
5. Used Cars Have More Miles
One final factor that helps explain today's lofty used car pricing is that the average mileage of used vehicles has increased notably during the pandemic. According to Cox Automotive, the average mileage on a used car before the pandemic was around 65,000 miles. But now the average used car for sale has about 71,000 miles.
With used car buyers keeping their vehicles longer before trading them in or selling them, the overall mileage of the used car supply has gone up. Back in 2019, only 15% of trade-ins had over 90,000 miles. But as of mid-2022, that share had jumped all the way to 25% of trade-ins.
Higher mileage translates to higher prices in a couple ways. First, there is the perception that a lower mileage car is in better condition and has more life left, so buyers are willing to pay more for less wear and tear. Additionally, higher mileage impacts used car pricing algorithms and models like those from Kelley Blue Book. More miles on the odometer lowers the estimated value, so a car with 90k miles will command a higher price than the same car with 120k miles.
This increase in the average miles per used car directly contributes to the rising prices we're seeing. With the average used car now being driven for longer before it hits the resale market, buyers are willing to pay more for the extra miles they aren't having to put on themselves.
How To Save Money on a Used Car Purchase
Given all these upward pricing pressures in the used market, you may be wondering if there are any smart ways to save money on a used car purchase right now. Here are some tips and tricks to scoring a good deal even in today's overheated used car market:
Consider buying from a private party rather than a dealership. Private sellers are often more willing to negotiate on price than major dealerships. Tap into Facebook Marketplace, Craigslist, or used car listing sites to find private sellers.
Look at models with lower demand. Avoid super popular models like the Toyota RAV4 or Honda Civic and you may be able to score a better price. Shop brands like Kia or Mazda that are less in-demand right now.
Consider a used rental car. Used rental cars tend to be well-maintained and depreciate quickly. Search rental car company listings directly or visit third-party used car sites like Carvana.
Extend your search radius. Be willing to buy a used car from a little further away, outside your immediate metro area, to increase your options and bargaining power.
Shop at the right time. Look for used cars in the fall and winter, when demand tends to be lower than spring or summer. Off-peak shopping can yield discounts.
Get pre-approved financing. By having outside financing already secured, you can strengthen your negotiating hand and focus on just the sale price.
The Outlook Ahead
While the used car market is scorching hot right now, analysts expect the market to begin cooling somewhat in 2023 and 2024 as new car production and inventories rebound. However, experts say used car prices are unlikely to fall dramatically. The average used car price will remain elevated compared to the pre-pandemic days.
For young people in the market for their first set of wheels, the tidal wave of factors pushing used car prices upward makes buying a car right now more expensive than usual. But by arming yourself with information, shopping at the optimal times, and employing the right negotiating strategies, you can still land a good used car deal even in today's overpriced market.
Stay patient, do your research, and be ready to pounce when you find the right used car at the right price. With persistence and smart shopping, you'll be cruising around in your new ride in no time. Good luck on the used car hunt!