When Will Used Car Prices Drop?

Due to recent developments in the market, the demand for cars has skyrocketed, with used vehicle prices reaching an all-time high. How long does this trend continue, and will the prices ever drop? There’s no concrete information yet, but some hints sprinkled across the information field could help us determine precisely that.

The Traditional Model Of Used Car Pricing

Second-hand vehicle prices were based on the following model: a new car loses about 20% of its worth in the first year, then declines by 10% annually until it hits a five-year-old mark. On average, a five-year asset costs about half its initial asking price.

However, due to high inflation rates and used vehicle prices spike, vehicles now depreciate much slower. You can suddenly discover that your worn-out truck sells for the same amount you bought it for. According to the dealers, the median price of a used vehicle increased by 50% compared to the pre-pandemic level of 2019. Some experts believe the market will eventually return to the previous model in the next two years, as right now, it struggles with significant changes.

What Happened To The Market

According to the dealers, used vehicle prices peaked in December 2021. This was caused by the new car supply shortage and sky-high value, meaning that people couldn’t afford factory-new rides, and had to make do with used cars.

The market for brand-new cars shrunk by 17% in 2021, with the global microchip deficit initially causing its collapse. The dramatic contradiction is that the newer vehicles require more and more microchips – up to 40% more than the ones produced before the pandemic. A vehicle could need 300 to 3000 semiconductor chips on different systems. But there are just a few semiconductor chip manufacturers worldwide, and most of them are in Asia. World car manufacturing is dependent on the few plants that are located there.

As a region, Asia passed through severe lockdowns and dramatic nature cataclysms, and the production volumes decreased. Some experts blame the car manufacturers as they reduced microchip orders at the beginning of lockdowns due to zero car demand and undermined their supply chains. Manufacturing and order volumes came back later but for much higher prices. During the crisis, most countries announced plans for import substitution and the creation of local microchip production sites. But that only proves beneficial in the long-term instead of fixing the current pricing situation. 

Most manufacturers slowed down their production rates as they didn’t have inventory. This caused a gap, thought to last until the end of the year, as other supply chains were affected. But even more, shortages will occur, and vehicle prices will reflect that.

Some Positive Signs

According to the recent wholesale quotes, the prices of second-hand vehicles dropped by 1% in April compared to March, and an overall slowdown in car sales was detected. Previously, the vehicle market was booming in April as people got their tax refunds. This year though, the sales dropped by 13% compared to March and 21% from April 2021. Such a drop could indicate an anticipated price release to increase demand. Yet nobody could predict the inevitable decline in prices until the end of the year. Considering the record-breaking inflation rates, even the same level of prices on used cars in the next 12 months would be a good sign.

Trading used vehicles to buy new ones is the best option. Not only a decent proposition to help you offset the spending on a new vehicle but probably the best deal of all possible. To cover up the gap in sales, automotive manufacturers lure their clients with the highest-ever trade-in levels. According to some dealers, the trade-in compensations grew to 60% compared to the previous year. As the prognoses claim, the new car prices will grow even further in the nearest future, along with auto-loan rates, which tend to climb as well. 

Summary

As an owner or potential buyer, you shouldn’t expect car prices to decrease substantially this year. Broken by inflation rates and new vehicle supply shortages, the previous model of used car pricing doesn’t work anymore and is unlikely to return to normal soon.

However, no one expects the prices to rise significantly in the following 12 months. That said, it’s still more cost-effective to make trade-ins as they offer the best rates out of all other possible options.

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