Why do used cars cost more now?

From a Local Used Car Dealer

THE CAR SHOP HAWAII

There seem to be several factors at work.

  • People are avoiding public transport and ride-sharing

  • New cars have become a lot more expensive

  • People don’t want to take on debt

  • Stimulus payments have put money in people’s pockets

The first of these points is clearly pandemic-related. Bus and train services have been cut back and people don’t want to be near strangers or in a car that’s just been used by someone else. That’s resulted in large numbers of mainly city-dwellers having to buy themselves a car when they’d previously managed to do without.

A second factor is that manufacturers have cut the number of inexpensive models they offer. They’d rather sell higher-margin, loaded SUVs than stripped-out compacts. That’s pushed budget-minded buyers to look at newer used cars, so the number of buyers has increased.

Third, while most car buyers finance their purchases, current economic conditions have made many wary about taking on more debt. That again has pushed people who might have bought new to consider less expensive options, such as cars coming off lease.

Last, while many recipients undoubtedly used their stimulus payments for necessities, others were able to put them towards replacement vehicles.

Why is the supply of used cars declining?

Used cars start as new cars, and after three years if leased, or six to seven years if purchased, they get sold or traded in to make way for a new replacement. So why are fewer of these cars coming onto the used car market? There seem to be many reasons, but we can group them under these three headings:

  • New car sales are down

  • People haven’t been driving as much

  • Car production is down

In a typical year, some 17 million cars are sold. In 2020 that dropped to 14.6 million. Some of those cars go to rental companies, which sell them on after a year or so. Hardly anyone was renting last year, so the rental companies stopped buying new vehicles. What’s more, you may recall that through March and April 2020 just about everything was shut down, including car dealerships. That meant for a while hardly any new cars were sold.

In parallel, people seem to be holding on to cars longer. Reasons for this include not driving as many miles, (because they were working from home,) and the high price of new cars. Linked to this, it seems more people are buying their car when the lease runs out, in part because they’re worth more than what they have to pay the lease company.

Last, the pandemic almost brought car production to a halt during the second quarter of 2020. Factories were shut or staffed by skeleton crews, and when they did start up it took only a single positive test result to send everyone home again.

Then, as the factories began ramping up output, a funny thing happened: they couldn’t get the semiconductor chips that run so many of the electrical systems in modern vehicles. It’s believed this is another consequence of the pandemic: chips went into the gaming consoles and laptops everyone bought while they were stuck at home, leaving too few to meet demand from automakers.

In response, carmakers scaled back production and focused on their higher-margin models. (This is one reason new car prices are up.) So, people looking to buy a new car are finding there are fewer to choose from and the prices are higher.

Options for someone who wants to buy a car

Bargains are thin on the ground, but you’re not without options. There are still some good deals out there buy you may have to do a little more research to find them.

Here are some ideas:

  • Look for models less in demand. Sure, an SUV would be nice but you’ll probably find better value if you look at sedans, hatchbacks, or even minivans.

  • Consider a car with higher mileage. While in the past buyers stayed away from vehicles with over 100,000 miles, advances in reliability mean many will offer years more service.

  • Although I am not a fan of this option, desperate times may call for desperate measures.  If you’re currently leasing, check the contract for the price-to-buy. Then find out what the vehicle is worth in the used car market. Before you decide to buy it from the lease company though, don’t forget to factor sales tax into your decision and understand all the figures before signing on the dotted line.

Buy a car now or wait?

If you want to buy a new car, or at least, one that’s new to you, this probably isn’t a great time. However, if you need a car for work or school you may not have much choice. The key to finding a good deal, or at least one you can live with, is to do your homework. That means knowing what you can afford and researching what you’ll have to pay. (One glimmer of good news: interest rates are still low if you have good credit.)

Many potential buyers will wonder if this jump in used car prices is a temporary blip or something more permanent. For that, we’ll defer to the independent authority on car quality and reliability, J.D. Power.

Their rather nuanced view is that “The current pandemic-related spike is just an anomaly.” However, they also caution that “… expect these trends to continue for the foreseeable future, as even after the pandemic has passed, used car prices are likely to continue rising.”

That seems to argue against holding out for lower prices in the future. So what can you do? Well, I suggest the best idea is to check in regularly with Auto Cheat Sheet for news and advice on car buying and selling