If you’ve been scratching your head wondering why it seems like used cars are so expensive now, you’re not alone. What you’re noticing is very real. One estimate puts the spike in used car prices at 42% higher compared to pre-pandemic conditions (source). Understanding what’s going on with used car prices isn’t hard, but it does require a brief refresher in economics and its laws of supply and demand, as well as a clear recognition of how closely intertwined are the markets for used and new cars.
Economics 101: Supply and Demand
If you’re wondering what in the world is going on with used car prices, we’ve got answers! And it all goes back to that Econ 101 course you took or didn’t take or maybe slept through way back when. The laws of supply and demand are pretty simple.
Let’s look first at supply. If the market is flooded with an over-supply of a product and the demand for the product stays about the same, sellers will reduce prices to get rid of the extra. On the other hand, if the supply decreases and demand stays the same, prices will go up because people are willing to pay more for something if it’s scarce and they want it.
Now let’s look at demand. If the demand for a product goes down for some reason and the supply remains the same, prices will go down as sellers try to get rid of their surplus. If demand for a product increases and supply stays the same, prices will go up because people are competing with each other to get what they want and will be willing to pay more to get it.
Okay, that’s the economic redux on the laws of supply and demand—and there won’t be a pop quiz, either! Now, let’s explain what the heck is going on with used car prices.
The Pandemic Recession Decimated the Used Car Supply
Think back to when the novel coronavirus and COVID-19 pandemic hit and forced lockdown, shut-downs, and stay-at-home orders. It felt like pretty much everything came to a screeching halt overnight, including most of the economy. Very few people were out shopping for cars, used or new. At that early point of the pandemic, it was demand that took a nose-dive. And if the supply of cars had stayed the same, prices would have gone down according to the laws of supply and demand. Instead, prices soon started going up. What gives?
The answer is that the supply of cars didn’t stay the same, especially for used cars. The supply of used cars went down. Why? Because one of the main sources for the supply of used cars is when they get traded in. According to NADA, here’s the break-down on where the used car supply comes from (source):
41.6% from trade-ins on new vehicles
23.7% from trade-ins on used vehicles
27.5% purchased from wholesale auctions
7.2% from street purchases and other sources
More than 65% of the supply of used cars comes from vehicles being traded in. When no one is out shopping for cars, they also aren’t trading their cars in! Then you’ll see that dealers also purchase more than a quarter of their used car supply from the wholesale auctions, but most of that activity shut down entirely during the worst of the pandemic, and still isn’t back to where it was before.
In other words, the downward pressure on prices the initial drop in used car demand should have had was far outweighed by upward pressure on prices caused by the drop in supply, with the net effect being prices pushed higher. But that’s just the beginning!
The Plot Thickens Thanks to a Disrupted New Car Market
The new car market and the used car market are tightly intertwined with each other. As you just found out above, more than 40% of the supply of used cars come from people trading in their old car when buying a brand-new car. But what happens if something disrupts the supply of new cars? This is exactly what happened.
As the pandemic wore on and the economy started to open back up, the demand for both new and used cars began to make a comeback, but supply? Not so much. As you’ve probably heard, pandemic has caused long-term disruptions in the global supply chain. One such result is a severe shortage of the semiconductors needed to make the microchips auto manufacturers put into new cars. Suddenly, there aren’t so many new cars to choose from as there usually are because automakers don’t have the electronic parts needed to keep churning out new cars. So, with a reduced supply of new cars, there’s also a reduced supply in used cars because of even fewer trade-ins happening.
Meanwhile, people who had their hearts set on buying a brand-new car are feeling frustrated they can’t get what they want, so many are willing to settle for at least a newer used car, which means more demand for used cars in the face of slim supply, which in turn means yet more upward pressure on prices, pushing them even higher. You can see how this just keeps spiraling in all the wrong directions.
Add into this that the demand for car rentals is also on the rise, but car rental fleets weren’t buying new cars during the worst of the pandemic, and now they’re having trouble meeting the demand for rentals because they can’t build up their fleets thanks to the new car shortage. In fact, many car rental companies are now also trying to buy used cars to beef up their fleets, causing the demand for used cars to rise even more and putting even more upward pressure on prices.
It May Get Worse Before It Gets Better
These market condition trends loops feeding back on each other and intensifying. When you hear people on the news warning about inflation (rising prices), can you guess what is one of the major sources of all this inflationary pressure? Yes, the car market, both used and new! And no, this situation won’t last forever, but it may well get worse before it gets better. After all, the semiconductor shortage isn’t going to magically disappear overnight, and as long as the supply of new cars is pinched, so too will be the supply of used cars.
The Silver Lining in This Whole Mess
There is, however, a significant silver lining in this whole perfect storm for those who want to take advantage of it. If you’ve got a used car you could sell, you stand to get more money for it right now than you ever thought possible. Dealers and car-buying services are snatching up used cars with record-setting quotes and competitive offers. You can see yourself if you go ahead and get an online Driveo quote to see what we’d pay for your car.
Driveo quotes are prepared by real people who do real market research, not an algorithm pulling data from who knows where. A Driveo quote is also good for a full 30 days, which means you have plenty of time to shop around and see if someplace else makes you a better offer. If they do, we just ask you give us the opportunity to beat it using our offer upload page. With Driveo you get a fast, transparent, safe process to sell your car quickly, and right now with used car prices higher than we’ve ever seen, you could get significantly more than you might have imagined. But these market conditions won’t last forever, so don’t delay, get your Driveo quote today!