For consumers, high price trends seem to move at a standstill – especially in the used car market.
Auto consumers likely don’t want to hear it, but some industry analysts say the U.S. used-vehicle market, which has seen prices skyrocket in 2022, won’t recover for three years.
That sentiment comes from the car insurance savings app Jerry, which released a report that estimates the used-car market won’t fully recover until 2025.
This from the report.
— In 2023, the total volume of used vehicles expected to flow through the wholesale market to retailers and buyers is projected to be 31% lower than it was in 2019. “In 2025, it will still be 22% lower, representing a shortfall of about 4 million vehicles that year alone,” the Jerry study noted.
— In 2022, the number of leased vehicles flowing to the used car market after the leases expire is 84% lower than in 2019. “The same deficit is expected in 2023, with only gradual increases through 2025,” the report stated.
— The vast majority of auto consumers are executing their purchase options, meaning about two million fewer previously leased vehicles will hit the used car market in both 2022 and 2023. “Previously, a returned lease was usually worth $1,500 to $2,000 less than the previously agreed post-lease purchase price,” the report stated. “But this year, those vehicles are worth $7,000 to $9,000 more.”
— After automakers slashed chip orders at the beginning of the pandemic, they are now struggling to get all the chips they need. “Shortage of the types of semiconductors used in automobiles is limiting production for another year or even two,” Jerry added. “So there will be a shortage of one- to three-year-old vehicles for years to come.”
Some of the news is good, as used car prices may have reached their highs, although it should take a while before those prices recede to near-2019 levels.
“The incredible bull market for used cars has likely peaked as new car production recovers and demand softens thanks to higher interest rates and deteriorating economic conditions,” the Jerry report stated.
But one- to three-year-old vehicles will be in short supply for years to come, the report concluded.
“This will keep a floor under prices, particularly for the most popular models. That’s likely to provide some relief for people who have bought such a vehicle in the past two years, but not so much for those shopping now or in the next few years.”
What to Expect in 2023
Even though auto industry experts believe a full recovery is years away, some progress toward closing that gap could occur next year.
“The used car market will see a growth decline in 2023,” said AutoLeadStar‘s vice president of marketing, Ilana Shabtay. “One, because it’s hard to top the records they hit this past year with the shift from new to used. Additionally, interest rates are rising, so consumer demand will decrease, even with the price drops that we continue to see.”
The used automobile industry is recovering slowly, in part because of problems with the global supply chain, which won’t be corrected anytime soon.
“The auto industry is experiencing supply constraints as a result of an ongoing semiconductor shortage,” an iCash senior investment adviser, Steven Holmes, said. “The Russia-Ukraine crisis is exacerbating rising raw material costs, which are also increasing car prices.”
Industry problems with getting new cars off the production line and into dealerships won’t be solved in 2023, either.
“By increasing 116% year over year in 2021, the weighted average cost of raw materials required to make a new car reached an all-time high,” Holmes said.
“Since lithium, nickel, and cobalt are crucial elements of electric car batteries, their prices have skyrocketed, and electric vehicles have been particularly impacted by growing material costs.”
Used automobile costs have increased as a result of the higher demand brought on by the lack of new vehicles.
“With fewer used cars available to trade in and fewer new cars on the road, used car inventories are put under pressure,” Holmes added. “Used cars are also susceptible to variations in commodity prices because these have an impact on their scrap value, just like new cars.”
Tips to Get a Good Used Vehicle in Tough Times
It’s an uphill climb, but used car buyers can strike a deal if they play their cards right. Use these tips to help get the job done.
Know your budget and stick to it. Being truthful about how much you can afford when making a significant purchase is the easiest approach to saving money.
“It’s the same when purchasing a used vehicle,” Holmes said. “Try to stay within that range if you currently have a car loan that is affordable. If not, allocate no more than 25% of your budget to car-related costs. Take into account both the recurring loan payment and any future increases in car expenses, including the price of fuel, insurance, and routine upkeep.”
Leverage the 90-day rule. For a good price break, purchase a vehicle that has been on a dealer’s lot for almost 90 days.
“At this point, a dealership is more willing to negotiate as the next step is to send that vehicle to the used car wholesale auction and more than likely lose money on the unit,” Selly Automotive’s founder, Zach Klempf, says. “Also, don’t be picky on color and trim, as the more narrow your criteria are, the less inventory is going to be out there in a slow market.”
Wait until the end of the month. Considering that dealerships work month-to-month, car buyers should look for deals toward the end of the month.
“That’s when dealerships try to turn as much inventory as possible before the month closes,” Shabtay said.
Additionally, if the shoppers are savvy enough to look for the “low interest” VDPs (vehicle description pages, i.e., the marketing materials used car dealers use when selling vehicles), they can cut a good deal.
“Those are the cars that have the least amount of views and the least amount of interest,” Shabtay added. “It’s in the dealership’s best interest to turn this inventory into capital. Those are where the good deals are buried.”