buying: When Will Used Car Prices Go Down?

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It isn't news to anyone who has shopped for a used car in 2022: The price of used cars has soared to record highs. According to the U.S. Bureau of Labor Statistics, its used car index, which tracks used car prices, has risen by 42% from December 2019 to October 2022.

The free-market used car arena is built on the foundation that sellers can sell cars for the maximum amount buyers will pay. At this point, buyers are showing willingness and ability to pay astronomical prices.

Used car prices shot from the first to the tenth floor like an elevator. They're likely to descend like an escalator, and a very shallow one at that. They may never reach the ground floor again. Though you don't feel it as often as a trip to the grocery store or gas pump, the cost of cars is a significant component of the country's inflation woes.

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"Used vehicle prices will remain exceptionally strong and not begin to go down until new market challenges make noticeable improvements," says David Paris, the director of market insights at J. D. Power Valuation Services. "There is a chance for some softening in used prices towards the end of the year as new inventory increases, but as of now no major relief in high used prices."

If you're in the market for a used car, you can't help but wonder when prices will come back down, if ever. Should you jump into a pre-owned vehicle now, despite the high prices? In this guide, we'll look at the causes of the price increases, when they'll come down and by how much and how to still get a good used car deal in today's marketplace.

How Did We Get Here?

Prices in the used car marketplace are highly sensitive to changes in supply and demand. Unfortunately for buyers, it's seen both higher demand and lower supplies since America began to emerge from its brief COVID-19-induced recession.

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High Demand

The spike in demand comes from several places, including new car buyers priced out of the new car market and shoppers flush with cash after receiving pandemic subsidy checks and putting off travel and other purchases for a couple of years. Some used car buyers put off purchases due to job uncertainty but now have to buy a vehicle to replace one that's reached the end of its life.

Adding additional fuel to the already raging fire of demand were extremely low interest rates on car loans, which enable buyers to pay more for a vehicle while keeping the size of their car payments in check.

Low Supply

The used car supply side is more complicated, and it starts with the new car industry. During the Coronavirus pandemic, production of new cars stopped and factories canceled their parts orders, expecting prolonged disruptions. Instead, demand for new vehicles roared back, leaving automakers unable to meet the demand for new cars. Just drive by a car dealership, and you'll be able to count every new car on the lot in the blink of an eye. That's pushed new car prices into the stratosphere, with most buyers paying sticker price or more – if they're able to find a car at all.

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That's pushed many new car buyers to look for used cars, which has driven up prices.

But that's not the only problem. With fewer new car sales, the supply of trade-ins arriving on used car lots has declined. Rental car companies, facing massive shortages of their own, are buying used cars, rather than flooding used markets with former daily rentals.

Because car lease residuals are far below market values, many lease customers are buying their cars, instead of returning them to dealerships. According to a report from auto industry analysts at KPMG, before the pandemic, more than three-quarters of General Motors' and Ford's leased cars were returned to dealers. In mid-2021, that number had dropped to about one in three for Ford and only one in ten for GM.

Will They Drop, Or Is This the New Normal?

Used car prices will likely drop at some point, as the market forces keeping them at such high levels are unlikely to persist forever. When and by how much is a question with as many answers as there are experts.

In the recent KPMG report, they illustrate four scenarios for the market to return to more normal conditions. They have time horizons ranging from the fourth quarter of this year until the last quarter of 2023. At least one of the KPMG scenarios (continuing low supply matched with high demand) has the potential to see used car prices climbing even higher before they decline.

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So, yes, you can expect price drops, but plan for a slow ramp down, unlike the rapid increases the used car market experienced.

Of course, further disruptions could accelerate drops in prices or bring them to a screeching halt. If rapid interest rate increases are matched with automakers' production of new cars returning to previous levels, prices could drop quickly. On the other hand, if shortages persist, it could be a long time before prices retreat significantly. New factory shutdowns due to parts shortages or the continuing pandemic could aggravate the lack of new car inventory, which is then reflected in the pre-owned vehicle market.

"J.D. Power is beginning to see some early improvements in production, which should continue over the second half of this year." says Paris. "However, despite improving new vehicle production, retail inventory on the ground remains extremely tight which will keep new and used vehicle prices high throughout 2022."

How Much Will They Drop?

While used car prices will probably drop, there's no consensus on how much they will fall, or how fast. The new price floor will likely be a long way off, even if prices start to drop quickly. Buyers who have been sitting on the sidelines will re-enter the market, and their demand will slow any price drops.

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If you're hoping for pre-pandemic prices, you should not be holding your breath. Even without market disruptions, the used car market would have seen some natural price climbs, just as new car prices have slowly risen through the decades. The price floor for the used car market will naturally be somewhat higher in 2023 than it was in 2019.

Prices and Interest Rates

Even as used car prices drop, the total cost of owning a used car may increase. That's because interest rates, which have been at historic lows, are quickly climbing as the Federal Reserve tries to tamp down inflation.

Here's an example: When you take out a $20,000 car loan for 60 months at 4%, you can expect to pay $2,100 in interest over the term of the loan. That makes the true cost of the car $22,100. With a 6% car loan, you'll pay $3,199 in interest, or $23,199 over the loan term. That's about $1,100 more than the 4% financing.

Will the Prices of Some Cars Drop More Than Others?

According to J. D. Power Valuation Services, any price drops we see in the used car market will not be evenly spread across all vehicle segments.

"If we fast forward to 2024, J.D. Power is expecting some of the larger declines to be observed in the segments that are the most superheated right now," says Paris. "These include small, compact and midsize passenger cars."

Should I Wait to Buy a Used Car?

If you were expecting a clear answer to this question, you're out of luck. The answer depends on your personal situation. If you need a car because your current vehicle has reached the end of the road, then, by all means, you should buy one.

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If you just want a car, but you have the luxury of waiting until prices come down, you should consider that option. This is a time when patience can pay off in a big way.

Learn more about the best times to buy a used car »

A key point to remember is that while the car you're buying will be more expensive, you'll likely get more money than you're expecting when you sell or trade your current vehicle. To maximize the amount you're getting, you should consider an instant cash offer, where you have local dealers competing to buy your car.

"This is really a case by case basis question and answer," says Paris. "If you NEED a used car, it's still a great time to buy." He adds that interest rates, while rising, remain favorable and equity (trade-in values) are still higher than ever. That helps offset higher costs associated with current new or used vehicle purchases.

How Can I Get a Good Used Car Price Right Now?

Even with the market disruptions, the fundamentals of buying a used car still apply. You first want to find a car that fits your needs and budget, has a clean vehicle history report and passes an inspection by an independent mechanic. If it's not a good car that can provide years of trouble-free service, there's no way it can be a good long-term deal. Our used car rankings and reviews will help you decide what vehicle is right for you.

"No matter what the car buying environment looks like, it's important to go into a purchase with a plan and knowing what your budget is," says Melinda Zabritski, Experian's senior director of automotive financial solutions. "For example, make sure your credit is in the best shape possible before you look to purchase a vehicle, to ensure you qualify for the best terms and interest rates."

You can mitigate the increased cost of your car loan by shopping for the best rate and having a pre-approved offer in place before you head to the dealership. While a dealership can arrange financing for you, they'll have little incentive to offer you a good deal unless they have an offer they need to beat.

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"Historically, credit unions often have some of the lowest rates, and in the current market, they're seeing an increase in loan activity in the automotive space," says Zabritski.

You should also expand your search to include a broader area. Driving from lot to lot isn't an efficient use of your time when you can easily narrow your search by looking online to see what's available in your area.

It's also important to watch out for add-ons you don't need. Stories abound of sellers telling shoppers they can only get a good price if they buy specific add-ons or accept an auto loan that the dealer arranges. They're just ways that the seller is raising the cost of the car.

Consider the Benefits of a New Car Warranty

With some used car prices eclipsing the sticker prices of new cars, you might want to rethink the idea of buying a used car instead of a new one. Unless you buy a certified pre-owned car, you won't get the warranty coverage with a used car you do when you buy new. Even if your budget allows you to purchase at the overinflated used car price, it might not be the best long-term decision.

Our guide to new car warranties shows the automakers with the best coverage.

What Does This Mean For My Car Loan?

The repercussions of buying an overpriced used car can lead to issues far down the road from the day you drive the vehicle home. Because prices are higher, buyers are taking out larger and larger used car loans and taking them out for longer terms.

According to Experian, the average used car loan amount in 2020 was $20,690. In the first quarter of 2022, it was $27,945. Over the same period, the average loan length increased from 64.54 to 67.65 months. Some of those increases can be attributed to more buyers purchasing higher-priced SUVs and crossovers, but higher used car prices across the board are also a significant reason.

Here's where the larger, longer loans can become a problem. When the value of your car drops faster than the balance of your loan, due to declining market values and natural depreciation, you can easily end up upside-down on your loan. That can put you in a bind if the car is stolen or declared a total loss after a crash, plus it leaves you with no equity to put toward the purchase of your next vehicle.

Learn more in our article on underwater car loans »

More Shopping Tools From U.S. News & World Report

In this period of market upheaval, it's more important than ever to have a plan in place to find the right car, the right price and affordable financing. Before you head to the dealer, take a look at our following resources and guides:

  • How to Buy a Used Car
  • How to Get a Car Loan
  • How to Negotiate a Used Car Price
  • New Cars Versus Used Cars
  • What's In a Vehicle History Report?

Our used car rankings and reviews are designed around the questions shoppers have when they're in the market for a pre-owned car.

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