Supply and demand rule the world of goods and services. When there were fewer to sell, used car prices skyrocketed. This event occurred only one year ago, leaving many car shoppers in a lurch. The lack of new car inventory and the fast turnover of used cars created a change in the automotive market that we’ve never seen before. It’s not normal for used cars to sell at higher prices than when they were new, but last summer, that was the story we all read. Thankfully, we’re beginning to see relief from this absurdity.
A Slight Dip in the Prices During May
The average used-vehicle price for May was $28,312, which is $60 less than it was in April. This still seems like an incredibly high price, but there are some factors to consider. The first issue does date back to last year when we saw the spike in pre-owned vehicle prices because of the semiconductor shortage. This shortage caused many new vehicles to either be left unfinished at the factory or not built at all. As dealer inventory of new models waned, used models rose in price and overall value, creating a topsy-turvy auto market.
The second reason prices remain as high has to do with the increased price of new vehicles. As these new vehicles have fancy bells and whistles, they alert us to every potential problem and keep us entertained, but these added functions come at a higher price tag than ever before. Higher new car prices translate to a similar increase for the same car when sold in the used market. Because of these two factors, it’s possible we won’t ever see prices for pre-owned vehicles drop back down to where they were before the pandemic.
Why are Used Car Prices Dropping?
Even though automakers still face a shortage of semiconductor chips and other necessary supplies to build vehicles at a pre-pandemic rate, the inventory of new cars has increased over the past several months. Additionally, new car prices are on the rise, while prices for used cars continue to drop. Most likely, this decline is nothing more than the market beginning to level off, but any decrease in the average price is a welcome one. The prices should continue to drop for the next several months and into next year, eventually finding the average point where things are back to normal.
How Much has the New Vehicle Inventory Increased?
Across the board, American car dealers report having about 7% more new vehicles for sale than they did one year ago. That doesn’t sound like a large number, but it’s a step in the right direction. Many automakers continue to project declining sales of new vehicles through the end of the year. That said, once the supply chain is normalized it’s possible dealers will be back to full levels of inventory, provided that’s the direction automakers are going with new vehicles after this tumultuous time is over.
Will We See Used Car Prices Increase Again?
There is one factor that could create an increased average price in some upcoming months. Unlike most years, the IRS is behind in issuing refunds to American taxpayers. In the middle of May, they had only
completed 74% of the refunds, which is frustrating to many expecting refunds to help pay for their next car. Typically, by that same time, the IRS has issued 100% of its refunds. This year, the refunds are at the highest average rate ever recorded. This delay in refunds could create more spending on used models, and some dealers might raise prices to grab more of this refund money.
Finally, It’s Hard to Find Models to Fill the Dealer Lots
Call it the accordion effect, cause and effect, or whatever you want. With fewer new cars in the market, there are fewer used cars for dealers to buy and fill their lots. Some drivers are waiting out the auto market until things get to their new normal before buying, and that means the source of used vehicles is stalled. This struggle means dealers worry their supply will dwindle and they won’t have vehicles to sell.
The lack of supply for car dealers can be measured in what they call “days of inventory.” This is how long it takes a dealer to sell out of a specific classification or price point of a vehicle if they can’t get more models. The average number of days for cars priced under $10,000 right now is 25, while those priced over $25,000 is 49 days. This is a short time frame considering the time it takes to bring a vehicle to the dealer and fill the used car lot with viable models for the next batch of car customers.
Incentives Are High for Pre-Owned Models
Many dealers offer special incentives and incredible deals for consumers willing to trade in their old car for a new one or to order a vehicle from the factory, leaving the new and used models on the lot for the dealer to sell. Some shoppers have been offered as much as 150% of what they owe on their current vehicle just to get it in trade. Of course, this depends on the model, condition, and the number of miles, but it shows you the type of incentives and deals being made right now.
Finally, An Answer to Your Question
Should you buy a car right now? Should you shop among the used cars or the new models? If you’re being offered a deal that seems too good to pass up, go ahead and take it. Right now, car dealers are at a slight disadvantage and want to bring more inventory to their locations.
On the other hand, if you’re looking for one of the special financing programs and don’t have much to offer the dealer, you should probably wait until the market levels off. If you’re looking for the best price for one of the used cars in the market, you’ll want to wait a few months; the prices should continue to drop and become much more favorable.
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