Used Car Prices Are Likely to Remain High. Here's Why.

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Article QuickTakes:

• Your trade-in is worth more than ever
• Virtual dealer auctions are the new norm
• Say goodbye to cheap new cars
• Electric vehicles are a double whammy for low used car prices

If the high cost of a new vehicle has forced you to consider shopping for a used car, you may be in for a shock. Used cars are getting higher returns than most stocks. According to Manheim auctions, the average wholesale price for a used vehicle in December 2021 was 46.6 percent more expensive than a year ago. To put that into perspective, a $10,000 car back in December 2020 is now likely worth nearly $15,000 just a year later.

Here’s a single example of how wild used car prices are right now: A 15-year-old car recently sold for $7,000 at a wholesale auction where auto dealers buy and sell used cars. This was not a full-size pickup truck designed to haul a mobile home on wheels. It was not an SUV with all the options and leather seating for eight American-sized passengers. This was a beige 2007 Ford Five Hundred SEL sedan—an unpopular “old man’s car” built a decade and a half ago and likely discounted to the hilt when sold brand new. After the auction gavel fell, the frumpy Ford brought $2,000 more at a wholesale auction than a nearly identical model I sold to a customer two months earlier. 

Some experts suggest this rise in used car prices is temporary. In December 2021, consulting firm KPMG predicted that used-car prices would fall by roughly 30 percent as the semiconductor chip shortage eased and new-vehicle supply increased, which the company projected would occur sometime between late 2022 and late 2023. This report, however, ignored recent structural changes to how used vehicles are bought and sold. Unfortunately for those of you shopping for your next car, SUV or truck, these changes will yield a vehicle price inflation that is likely to be permanent.

Your Trade-In Is Worth More Than Ever 

Let me start with the good news first. Just two years ago, the typical way to trade in your used car was to drag it to a car dealer, wait for them to appraise the vehicle, and get a price that reflected the fact that the dealer had no competitors nearby. 

The internet has changed that closed-door exchange. Today you can get at least a half dozen appraisals online within a couple of hours without your car ever leaving your driveway. More importantly, these online vehicle retailers such as Carmax, Carvana, Vroom, Shift, and GiveMeTheVin are usually willing to pay top dollar to acquire cars. Of course, that means the buyer is going to shoulder that additional cost when your vehicle finds a new home. These booming online businesses aren’t likely to slash their offers anytime soon. Having a huge variety of cars is key to their strength, and if they buy a vehicle they can’t sell to customers, they can easily pass it off to another dealer.

Dealer Auctions Have Gone Virtual 

Large, billion-dollar companies like Carmax, Carvana, and AutoNation have figured out how to make dealers that are sometimes more than 500 miles away compete directly against one another for your used car.

Back in 2020, I would regularly see no more than 80 dealers at a live Carmax auction where trade-ins were sold to other dealers. Most of those dealers were in-state or local. Today, those same auctions can have three to four times the number of dealers watching the same car being sold exclusively online. At the Carmax auction where that Ford Five Hundred sold, I was bidder number 243. That means 242 other dealers were there as well with the same opportunity to buy that car. 

If you want to sell your vehicle, the increased online competition is what’s driving prices up on what you own right now. However, the cost of buying your next new or used car will likely be going up even more. 

Say Goodbye to Cheap New Cars 

Back in 2016, nearly every major manufacturer sold a cheap new car that could be had for $20,000 or less. By my count, more than 25 models were available. Today that number is down to six, with one, the subcompact 2022 Chevrolet Spark that starts at just $14,999 with destination, already scheduled for the chopping block before the end of the year. 

Small and cheap cars are often the least profitable vehicle an automaker can produce in North America. Recent changes to the government fuel-economy mandates have made it easier for automakers to drop their small cars and remain in compliance. As these unpopular gas sippers reach the end of their lifecycles, don’t be surprised if more automakers bow out of the segment rather than spend the money to develop a new model. With fewer affordable new cars being sold, it follows that there will be fewer affordable used cars in the future, too. 

Electric Vehicles Are a Double Whammy for Low Used Car Prices 

Thanks to a $7,500 federal tax credit and numerous state and corporate subsidies, EVs will likely be more profitable to sell in the long run than those small gas cars. Those same EVs will also blast big holes in those government’s fuel-economy requirements, which will allow automakers to sell far more gas-guzzling trucks and SUVs than they ever could with those cheap small gas sippers. 

The two segments that saw the greatest price increases in 2021, compact cars and vans, have also seen a massive decline in the number of competitors over the last 20 years. Minivans have gone from 18 models during their sales peak in 2000 to only four for 2022 (Chrysler Pacifica, Honda Odyssey, Kia Carnival, and Toyota Sienna). The number of compact and other nonluxury small vehicles have declined from more than 40 models in 2000 to only 12 today. The lack of available small vehicles will likely push prices upwards for these ever fewer cheap used cars that are available to consumers.

Supply and demand are not the only levers that determine used car prices. Everything from the competitiveness of wholesale markets to the rise of technology and government subsidies can alter the balance in favor of one over the other. Once the chip shortage is over, and automakers can build millions more new cars, you may see the price of used cars dip a bit. However, unless the economy enters a serious recession, don’t expect used cars to become as cheap as they once were. Those good old days seem to be gone.