Why Are Used Car Prices So High

The global economy has calmed, but why are used car prices still so high?

In December of 2019, the world was enjoying steady economic growth. Once the COVID-19 pandemic hit in early 2020, that all changed for several reasons. The automotive industry was especially hard-hit, being plagued by plant shutdowns, material shortages, and record-low vehicle inventory. But why is the industry still affected three years later? Let’s take a look at some key reasons below.

 

Slow Dealer Inventory Recovery

Driving past a car dealership circa 2020 or 2021 was an unusual sight. The showrooms and outdoor inventory parking areas were empty, and the few new and used cars that did arrive at the dealership were sold before they hit the pavement. As supply went down, demand and prices went up. Inventory scarcity did end up subsiding at the end of Q4 2021, but the effects are still felt today. Vehicle prices, while they have stabilized, are still roughly 21 percent higher than pre-pandemic levels. That statistic alone is enough to show that the automotive industry is still feeling the effects of COVID-19.

Vehicle Price Increase

As was mentioned in the previous paragraph, used vehicle prices have increased, which averages out from $38,000 per transaction in 2019 to roughly $48,000 per transaction in 2023. This sharp increase is due to inflated pricing. Dealers began to implement steep mark-ups when inventory was scarce, which is still somewhat practiced today. This strategy causes a chain reaction that begins when a certain car is sold new and continues as the initial purchase price is reflected when the vehicle is sold again. Dealers cannot be solely blamed for these increases, as some of the initial marking-up of prices was done to offset their own increased costs from the factory.

Inflated Interest Rates

Three years ago, interest rates reached a historical all-time low, with hopes to stimulate economic growth after the initial shock of the pandemic. While this was helpful at the time, these interest rates have begun creeping back up again, and are reaching levels higher than previous. This increase directly affects buyers who finance their vehicles, with higher interest rates increasing monthly payments, which in turn increases the total cost of owning a vehicle.

For example, a $35,000 car financed with $0 down at 2.9 percent interest for 72 months has a monthly payment of roughly $530 a month. If we change that 2.9 percent interest rate to 6.9 percent, the payment will jump to almost $600 a month. A seemingly small percentage increase turns into a big one, especially considering the total of payments increases by almost $6,000.

There are several reasons why used car prices have increased, and while the global economy has somewhat stabilized, the effects of COVID-19 still reverberate throughout the automotive industry. How long do you think prices will stay high?