Sky-High Used-Car Prices Are Finally Coming Back Down To Earth

One of the golden rules of the auto business has long been that, perhaps with the exception of cherished collectibles, vehicles always depreciate in value, literally the moment a new model is driven off a dealer’s lot. However, as with so many aspects of life affected by the pandemic these past few years, the old rules failed to apply. As a result, pre-owned cars, trucks, and SUVs actually increased in value, and by a whopping amount.

For those who may have not been paying attention, new-vehicle shortages that plagued the pandemic era via a lethal combination of early plant closures and later supply chain issues and over-sticker transaction prices sent a disproportionate number of shoppers—including rental-fleet buyers—to the pre-owned side of the market out of sheer necessity. The added demand subsequently decimated dealer inventories, and triggered what amounted to stratospheric price increases, even for older “beater” cars.

Market forces in the auto industry became so volatile, some late-model used cars in the greatest demand commanded nearly as much last year—in some cases more—than harder-to-find brand new versions.

Talk about a roller coaster ride: According to the Consumer Price Index, used vehicle prices climbed by a whopping 45% from June 2020 to June 2021 before falling 8.8% over the 12-month period ending this past December. Edmunds.com says the average used-car transaction dropped to $29,533 at year’s end, which is around $1,600 less than it was in April 2022 when it reached $31,095. At that, older models are seeing the biggest price reductions at an average 15% below what they were in early 2022.

A just-released study of 1.8 million used-vehicle transactions by the online marketplace iSeeCars.com indicates the biggest loser here is the formerly steadfast Tesla Model 3 electric sedan. It dropped in price on the pre-owned market by an average 16.8 percent from last September to December, which amounts to a $8,822 loss. Other vehicles that saw the largest price plunges during this period include the Nissan Kicks (-11.9%), Ford Mustang (-11.5%), Hyundai Ioniq Hybrid (-11.0%), Toyota RAV4 (-8.9%), and the Jaguar E-PACE (-8.0%).

On the other hand, some pre-owned models on the luxury side of the ledger proved to be more resilient over the fourth quarter, and actually continued their upward course. Top among the winners in this regard is the large and in charge Cadillac Escalade SUV, which saw its transaction prices rise by an average 14.9%; it’s stretched version, the ESV jumped in price by 12.6%. Other models showing the biggest price bumps include the Porsche 911 (+14.8%), Mercedes-Benz S-Class (+13.6%), Maserati Levante (+13.3%), Maserati Ghibli (+13.1%), and the BMW 7 Series (10.0%).

Unfortunately, falling used car prices are not necessarily good news to all parties. For starters, one of the reasons used vehicle prices are headed downward is because interest rates are moving in the opposite direction, thanks largely to the Federal Reserve’s recent Federal Funds Rate hikes made to help tamper inflation. According to Experian, the average used-vehicle financing rate during the third quarter of 2022 was 9.34%, compared to 8.12% a year earlier. Those financing a pre-owned model will face higher monthly payments as a result, with those having less than prime credit rating suffering the biggest increases. Cash buyers, needless to say, remain unaffected in this regard.

However, even those who can cover the cost of a new or used-vehicle purchase out of pocket will find dealers offering less money for their existing models as trade-ins. That has the effect of a de facto price increase on the vehicle being purchased, and it’s exacerbated if one is financing the deal, given the concurrent jump in interest rates. Those who bought a new or used vehicle when transaction prices peaked last year will tend to suffer the biggest losses in this regard. According to Edmunds.com, the average trade-in value last month was $22,605, which is nearly $3,000 less than it was at the market’s peak last June.

What’s more, these factors should cause new-vehicle leasing costs to rise, as monthly payments are based upon the difference between the transaction price and its residual (resale) value at the end of the term, financed at the going rate of interest.

Insiders expect used-vehicle prices to fall even further moving forward as new-car inventories continue to reach normalcy. However, it may take some time for them to reach pre-pandemic levels, as slumping new-model transactions in recent years means there’s fewer trade-ins and off-lease vehicles coming back to dealerships.

As always, stay tuned…