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- Used car prices have skyrocketed over the past year.
- A tightening in the supply of new cars is stimulating the demand for used models.
- Prices may not return to normal for at least a year, an expert told Insider.
- See more stories on the Insider business page.
If you are looking to get a good deal on a used car to take advantage of the hot summer weather, this is not going to happen.
The used car market is absurdly and unprecedented right now. Used vehicles cost 40% more in June than before the February 2020 pandemic, according to data from JPMorgan.
The average nine-year-old car changed hands for $ 13,250 in June, according to automotive research site Edmunds. That’s a 30% increase from the same month in 2020, while a five-year-old vehicle will set you back $ 24,000, more than $ 6,000 from a year ago.
The madness boils down to a simple economy: the demand for used cars far exceeds their supply, pushing the prices higher and higher. But the reasons for the limited stocks and the high interest in used cars become a little more complicated.
Why are used cars so expensive right now?
The used car market is closely tied to the new car market, says Kayla Reynolds, analyst at Cox Automotive. The latter is going through a difficult period and these problems are having repercussions on the second-hand market.
A devastating shortage of microchips – which are needed for all kinds of critical electrical components – is slowing automobile production around the world, choking the supply of new models and driving up their prices. High dealer margins and a lack of options are forcing more buyers to buy used, which is reducing used car inventories, Reynolds said.
To put the magnitude of this shortage into perspective, the inventory of new cars in the United States fell 54% in June from the same month in 2019, according to Cox. Dealer incentives have fallen and transaction prices for new cars have reached all-time highs.
This brings a whole new set of customers into the used market, people who were willing to spend a lot of money on a whole new set of wheels and who in turn are driving up used car prices. , explains Ivan Drury, Senior Director of Insights. at Edmunds.
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A drop in the number of new cars coming off the assembly lines has disrupted the flow of vehicles to and from rental agencies, which are typically a major source of used inventory. Rental companies, which sold cars en masse during the pandemic, typically buy around 2 million new cars each year and return them every 1 to 2 years, Drury said.
With the upsurge in travel, they’ve resorted to used cars – and they’re not giving up on them.
In addition, with the prices of new cars skyrocketing, people are keeping their aging vehicles longer instead of trading them in, cutting the flow of cars into the used market. For the same reason, they choose to buy their leased vehicles at the end of the term, rather than trade them in for a new lease.
When will the madness end?
There is good news. Prices appear to have peaked in May and are returning to Earth.
Between May and June, wholesale car prices fell for the first time since December, suggesting that demand and supply are on the way to some kind of equilibrium, Cox’s Reynolds said.
She expects retail prices to follow soon, and buyers will start to notice that car lot prices gradually decline by the fall. The declining pandemic-induced car-buying frenzy is part of the reason for the change, she said.
But the tight supply caused by the chip shortage isn’t going away anytime soon, which means it could be some time before buyers see the used car prices they’re used to. . Even once the new models are back in stock, the second-hand market will not return to normal overnight, Drury said.
His advice to car buyers: “I would say it takes at least six months. And in all fairness, if you can wait a whole year, you’re better off with that. “
Are you a car dealership, private buyer or seller with a story to share on what it’s like to buy and sell cars in this hot market? Contact this reporter at [email protected]
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