For nearly a year, the average used vehicle in the United States had once again become affordable for millions of people. The relief felt late and relatively mild, but it was welcome nonetheless.
From a high of $31,400 in April 2022, the average price had fallen 14% to $27,125 earlier this month.
Now, with the supply of used vehicles unable to keep up with still-robust demand, prices are rising again, with signs pointing to further increases. Many buyers have been priced out of the new car market, resulting in fewer trade-ins hitting dealer lots. Adding to the shortage, fewer used vehicles come off leases or are offloaded by rental car companies.
Average list prices for used cars have risen about $700 in the past month, and Alex Yurchenko, chief data officer at Black Book, which tracks prices, said he expects prices to continue rising, at least through summer
“If you have to buy a used vehicle,” he suggested, “right now would be a good time.”
Pete Catalano, a car dealer in Independence, Missouri, a suburb of Kansas City, has been struggling to get enough cars at affordable prices.
Typically, Catalano and his daughter, who co-own Stadium Auto, have about 50 vehicles in their used car lot near Arrowhead Stadium. Now they only have about half. Some rival dealerships, Catalano said, enjoy a competitive advantage because they can afford to offer financing to buyers with poor credit.
Squeezed by higher prices for gasoline, groceries and utilities, many of Catalano’s customers can’t afford either new or used vehicles; He said some would-be buyers he knows use their tax refund just to make ends meet instead of buying a needed car.
“A cheap used car is becoming more and more a luxury,” Catalano said. “What the market wants right now is not available, and that’s $3,000, $4,000 and $5,000 cars.”
Behind the shortage of vehicles and inflated prices is simple supply and demand. Much of the problem stems from rising new car prices. In February, according to Edmunds, the average new vehicle in the US sold for nearly $48,000, beyond the reach of many consumers.
Although the supply of new vehicles has gradually increased, they are still relatively scarce and expensive. Automakers still lack a sufficient supply of computer chips to produce enough vehicles to meet demand, a lingering consequence of pandemic-related supply shortages. New vehicle sales last year were about 3 million below normal levels.
Fewer new car sales means fewer trade-ins, which means fewer used vehicles for sale. Meanwhile, auto loan rates are expected to continue rising this year as the Federal Reserve continues to raise interest rates to cool headline inflation.
On used lots these days, deals are hard to come by. Even after accounting for last year’s price drops, the average price of a used vehicle remains about 35% above where it was before the pandemic hit three years ago. At the time, the average price was $20,425.
Once federal stimulus checks were sent to most American households, demand for automobiles increased as many people spent the money. As they spent, the supply of used vehicles fell and prices rose. At the beginning of last year, the average price of used vehicles increased by more than 50% from just before the pandemic.
Exacerbating the shortfall was a shortage of affordable new vehicles. Automakers were using their tight supply of computer chips to build more expensive and profitable SUVs and pickup trucks. They built fewer affordable new models, a trend that sent more buyers to used car lots. The result was increased demand and higher prices for used vehicles.
All of this left people like Carol Rice struggling to find an affordable and decent used vehicle. Rice, 65, suffered a long period of frustration while shopping for a used truck for his farm near Carbondale, Kan. For six months, he found little.
“I’m retired and can’t afford to buy a new vehicle,” he said. “There weren’t that many used vehicles, and if there were, they were quite expensive.”
Last month, he finally found a 2003 Ford Ranger on Catalano’s website that he liked and could afford. He bought it for $7,700, even though it’s 20 years old and has 140,000 miles.
“It was a good looking vehicle and the price was right,” he said.
In the immediate future, few analysts expect used vehicle prices to fall. Catalano said he doesn’t expect a sustained drop in prices for perhaps the next year or two.
Others say it’s harder to predict. Amy Gieffers, senior vice president at Vroom, an online auto-buying site, said some market forces are expected to continue to keep supply and prices up: fewer trade-ins, fewer leases, fewer sales of fleets by car rental companies.
On the other hand, he says, more expensive vehicles and higher loan rates are expected to depress buyer demand. Finally, lower demand is expected to force distributors to lower prices.
“It’s very complex right now,” he said, “because you have some competing forces.”
Black Book’s Yurchenko and Charlie Chesbrough, senior economist at Cox Automotive, said they expect used vehicle prices to rise over the summer before easing slightly as part of a normal year-end depreciation cycle .
By early 2023, Chesbrough said, higher loan rates were poised to drive buyers away from the new and used markets. Instead, strong demand from affluent buyers for expensive late-model used vehicles has bolstered U.S. sales.
Many of these buyers pay cash to avoid higher interest rates. The average used car loan rate is now 11.3%, up from 8.1% when the Fed started raising rates a year ago, according to Edmunds.
Because demand is strong and vehicle supplies are short, Chesbrough said he doesn’t expect sales to drop even if the economy were to fall into recession. Although many buyers with lower credit scores have left the market, sales remain strong, he said.
With used car inventories likely to remain tight for the foreseeable future, Chesbrough said he doesn’t expect prices to return to pre-pandemic levels.
“We just haven’t created enough personal transportation in the last couple of years,” he said.
