Inflated Used Car Prices: What Goes Up, Must Come Down, KPMG Says

There’s no doubt, record high used car prices are a bubble. Eventually, used-vehicle prices will come back to earth.

The question is whether the bubble bursts suddenly, or slowly deflates, according to a new white paper titled, “Used car prices could crash — will they?” from KPMG.

“Once you can buy a new car, say you get a brand new one, with all the whiz-bang technology on it. What’s going happen to the value of that used car?” said Gary Silberg, global automotive sector leader for Chicago-based KPMG LLP (U.S.).

Silberg can make a case for either a soft landing, or a hard crash. “Some humility is in order,” when predicting which is more likely, he said in a recent phone interview..

The stakes are high, for consumers, auto dealers, auto manufacturers, and auto lenders. In November 2021, wholesale prices for used cars were up 44 percent over November 2020, KPMG said. In December, J.D. Power estimated that for the first time the average used vehicle was selling for $30,000, according to the white paper.

Those high prices cut both ways for consumers. Used vehicles cost more to buy. Conversely, trade-ins are more valuable. But new-vehicle prices are also inflated, because new vehicles are in short supply, too, due to a computer chip shortage and other supply-chain problems.

The new-vehicle shortage is a root cause for the run-up in used-vehicle values. Many new-car shoppers are turning to used, when they can’t find the new vehicle they want.

Some new-car shoppers are also buying used vehicles instead, because as high as used-vehicle prices are, they’re lower than new-vehicle prices, which now average more than $40,000.  

Used-vehicle demand is so high, some used vehicles have actually grown in value over time. That’s an unheard-of outcome. Historically, used vehicle values decline with age and mileage, except maybe the kind of vintage collector cars you see in glitzy auctions on TV. But now, it’s happening with fairly ordinary used cars and trucks, KPMG said.

Eventually, automakers will solve the computer chip shortage and other supply-chain problems, like access to certain critical raw materials, and a shortage of skilled workers.

So far, that’s happening slowly. But sooner or later, the auto industry recovers its ability to produce more new cars and trucks than consumers want to buy. At that point, auto prices will fall, Silberg said.

It’s also conceivable inflation gets out of control in other categories besides autos, and a full-blown recession results across the economy, he said. If that happens, demand falls, too.

Silberg said he’s not fooling, when he says it’s too hard to predict how far and how fast used-vehicle prices will fall. “Like I said, humility is in order.” He suggests automakers better be prepared for either a soft or a hard landing. “The auto industry better be doing their scenarios.”