Used car prices peaked last summer, but they’ve been slowly dropping back toward normal since October. That streak broke in April, however, as prices ticked back up. Also, declines notwithstanding, used car prices remain near their record highs. That means it’s a great time to sell your late-model car, but not such a great time to buy.
According to a new report from Edmunds.com, a smaller selection of used cars offers few affordable options for buyers. While prices have retreated from their historic highs, there are still many factors that are bolstering used car values in the market.
“Used car prices remain historically high,” Edmunds noted. “The average used vehicle transaction price in Q1 2023 dipped by 6.4% year over year to $28,381, compared to $30,329 in Q1 2022, but is up 44% from Q1 2018’s average used transaction price of $19,657.”
So … ?
What that means — for lower income consumers in particular — is that less expensive used cars of good, reliable quality are getting very hard to find.
“The share of used vehicles sold for under $20,000 was 30.6% in Q1 2023 compared to 60.5% five years prior. In the new vehicle market, the share of vehicles sold for under $20,000 was less than 1% in Q1 2023,” Edmunds reports.
It’s worth noting this assumes that vehicles up to $20,000 count as “affordable” in an era where the minimum wage barely cracks $15 an hour in the most urbanized states, and is half that amount in many other states.
The primary reason for the high used vehicle prices is simply supply and demand. The supply of used vehicles is down everywhere, as many consumers choose to stay in their aging vehicles rather than buy a new one — in fact, the average age of vehicles on the road in the U.S. is at a record high: 12.5 years. That reduces the used supply without meeting demand, so prices rise.
The proof is in the statistics. According to Edmunds, “lease volume dropped significantly to 559,000 vehicles in Q1 2023 from 1 million vehicles in Q1 2018. Trade-in volume declined to 5.5 million vehicles in 2022 from 6.2 million vehicles in 2018.”
Ex-rental vehicles, which have historically been a steady source for near-new used vehicles, are now being sold much older and at higher mileage, yet still are more expensive than in the past. “The average off-rental vehicle age climbed to 3 years in March 2023 from 1.9 years in 2019, and the average price climbed to $28,916 in March 2023 from $15,829 in 2019,” Edmunds said.
“The good news is that used prices have softened enough in Q1 to offer some relief for consumers getting pushed out of the new market. The not-so-good news is that the used vehicle market continues to be challenging for car shoppers since there are fewer vehicles available and demand is keeping prices historically high,” said Ivan Drury, Edmunds’ director of insights.
“Consumers returning to the used market for the first time in years might find conditions a bit shocking: Not long ago, $20,000 was seen as an acceptable amount to spend on a used car to get an optimal blend of miles and age. In today’s market, $20,000 puts consumers into a much older or much higher-mileage vehicle.”
Is it the best time to sell?
One point that Edmunds analysts make is that buyers who currently own late model used cars have avoided the usual expected depreciation. In many cases, buyers who purchased a certified pre-owned car just prior to the pandemic may see little depreciation due to the general rise in used car values in the last three years.
Edmunds point out, “in Q1 2023, the average mileage of a 5-year-old (2018 model year) Toyota Camry was 60,565 miles (a 130% increase compared to an average of 26,288 miles in Q1 2020), but instead of a price decline, the average transaction price of the vehicle increased by 8% in Q1 2023 to $21,223 compared to $19,656 in Q1 2020.”
How can you beat the market?
Edmunds analysts offer three strategies to beat the market in this era:
- Know your trade-in value. As a used-car owner, extra equity from your trade-in continues to be one of your biggest negotiating tools in today’s market. Before you begin shopping for a vehicle, get a free appraisal for your vehicle on sites like Edmunds so you can factor your trade-in value into your budget. You can also keep tabs on the changing value of your trade-in.
- Shop around for preapproved financing. Interest rates for used vehicles are hovering near record high levels in recent history, and significantly driving up costs for the majority of consumers. Make sure to seek approval from more than one lender to compare rates. With a preapproved loan offer in hand, you can quickly decide whether the finance rate the dealership offers you is the better deal.
- Flexibility and thoroughness will be critical. If you’re accustomed to buying near-new (1- to 2-year-old) CPO vehicles, consider shifting your sights to slightly older (3- to 5-year-old) vehicles. Just be diligent with this approach: Make sure to buy from a reputable dealer that offers a detailed vehicle history report, consider paying a mechanic to conduct a prepurchase inspection, and test-drive the vehicle before your purchase.
“Extra diligence, patience and research is more critical now than ever for used-car shoppers,” said Joseph Yoon, Edmunds’ consumer insights analyst. “With demand and prices still high, shoppers really need to be active in search of the deal they desire and be prepared with an understanding of vehicle availability, financing options and their own budget long before they step into the dealership.”
Edmunds analysts note that used vehicle prices will probably remain high through the rest of 2023.
“If new car sales stall out, automakers and dealers could leverage heavier incentives to entice consumers into new purchases, which would in turn place downward pressure on used car values,” said Drury. “But since most automakers have been deliberate in aligning vehicle production and demand to avoid the inventory glut issues they faced prior to the pandemic, consumers probably shouldn’t count on any major bargains or discounts through the rest of the year.”