Why Are Used Cars So Expensive Right Now?

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Article QuickTakes:

• New car shortages have a ripple effect
• Fewer off-lease cars are returning to dealer lots
• Is demand about to soften?

The used car market has long been a logical alternative for shoppers seeking a bargain, but things have changed drastically in the last couple of years. The pandemic shut down the world, including the automotive industry. A chip shortage led to a new car drought, and with fewer new cars available for purchase or lease, used car values escalated. Read on to find out why used cars are so expensive right now.

New Car Shortages Have a Ripple Effect

“The factory that makes used cars is new vehicle sales, and that factory has been underperforming the last couple of years due to supply shortages,” said Jesse Toprak, chief analyst at Autonomy, an electric vehicle (EV) subscription service.

More than 17 million new cars were sold in the U.S. in 2019, but by 2021 that number had dropped to just 15 million. The result, Toprak explained: “We simply don't have sufficient inventory of used cars, which has been driving up the prices.”

The new car and used car shortage combined to inflate values. According to data from Kelley Blue Book, the average used car price increased from about $19,000 in 2019 to just under $30,000 in 2021.

Fewer Off-Lease Cars Are Returning to Dealer Lots

Lease buyouts are another reason why used cars are so expensive right now. “We are seeing an unusually high number of lessees choosing to buy out their leased vehicles at the end of their lease term,” Toprak said. This is driven by the record used car prices—vehicles are often worth more today than the projected value established when the lease was signed—he added, creating a scenario where the vehicle’s market price is actually higher than the residual value.

The new car shortage creates another incentive for someone to buy out their lease, as it can be difficult to find a suitable replacement.

“The fact that it's hard to find desirable vehicles out there at the moment, new or used, is also contributing to this buyout trend, which is further constricting the used-car supply,” Toprak said. “Lease returns that would normally go back to the manufacturers' captive finance arms and then to dealerships are now being kept out of the used car marketplace.”

Signs That Demand Is Softening

Recent government inflation data says that used car prices dropped in March, 2022 by 3.8% compared with the previous month. Additionally, CarMax, the used car superstore, reported slower sales in the fourth quarter of 2021 compared with the same period in 2020.

That paints a promising picture for car shoppers. Still, the average price of the vehicles sold by CarMax rose $8,300 in the 12-month period ending February 28, 2022. And some categories of vehicles are still far from normalizing.

“When we add in the element of historically high gas prices fueling unrelenting consumer demand, we don’t anticipate any easing in the prices of EVs for at least the next year, especially for very high-demand models such as the Tesla Model 3,” Toprak said.

Other analysts are equally cautious. “Prices remain high,” Charlie Chesbrough, Cox Automotive’s senior economist, noted in a news release. “Year-over-year growth rates will come back to earth. However, prices will not go negative. Rather, they should return to more normal growth trends, but from a higher base.” In other words, prices are unlikely to drop anytime soon, but they could stop climbing so quickly in the near future.