Lauren Fix, The Car Coach: Used Car Market Won’t Recover Till 2025

Prices of new and used cars seem to be fluctuating every day. You probably don’t want to hear this but, the car industry, both new and used-vehicle markets, which has seen prices skyrocket in 2022, won’t recover for three years.

The car insurance savings app Jerry, as well as other sources are saying that there are signs the used car market is headed back in the direction of normal. Prices have begun to fall and some analysts are predicting significant declines in 2023. And automakers are fixing the supply chain disruptions, particularly those involving semiconductors, that caught them flat-footed and decimated vehicle production, causing consumer demand to spill over into the used car market.

The disruptions of the past few years will likely reverberate through the used car market for years to come, as one- to three-year-old used vehicles, particularly those models most in demand, remain in short supply. This means that, barring a severe recession that destroys consumer demand, any downside for used car prices, particularly newer used vehicles, will likely be limited. It looks like interest rates are going to increase again and this is bad news for new and used car prices.

Believe it or not, we still have a shortage of the types of semiconductor chips used in automobiles is still limiting production. The supply of chips likely won’t meet automakers’ demand for another year or even two.

Production of as many as 15 million vehicles have been cut by global automakers in 2021 and 2022, with another 2 to 3 million vehicles missing in 2023. That’s millions of vehicles that would have hit the used car market in the next 2-3 years, but now there won’t be those future used cars hitting the market. In 2023, the total volume of used vehicles expected to flow through the wholesale market to retailers and buyers is projected to be 31% lower than in 2019, according to Cox Automotive.

For 2022, the number of leased vehicles flowing to the used car market after the leases expire is expected to total only about 400,000, that’s 2.1 million fewer than in 2019, a decline of 84%. That will impact used car sales in 2025 and 2026.

Maybe you are considering a new car, but keep in mind: There are no incentives or discounts and won’t be until the supply chain and chip shortage is repaired. People are then looking to used vehicles, fewer new vehicles on dealer lots means more people will look to buy lightly used vehicles, one- to three-year-old versions of their preferred models. And it also means that, eventually, fewer lightly used vehicles will flow into the used car market as trade-ins.

Making matters worse is that another key source of vehicles for used markets has almost entirely dried up. Prior to the COVID-driven market upheaval, most people who leased vehicles gave them up when their leases expired, declining to exercise their right to purchase them.

But soaring prices for lightly used vehicles changed their math; previously, someone returning a lease usually found the vehicle was worth $1,500-$2,000 less than the previously agreed post-lease purchase price, according to analysts at Manheim Automotive. But this year those vehicles are worth $7,000-$9,000 more. So the vast majority of people are executing their purchase options, meaning 2 million or so fewer vehicles will hit used car lots both this year and next.

The incredible bull market for used cars has likely peaked as new car production recovers and demand softens thanks to higher interest rates and deteriorating economic conditions. But there will be a shortage of one- to three-year-old vehicles for years to come. This will keep a floor under prices, particularly for the most popular models. That’s likely to provide some relief for people who have bought such a vehicle in the past two years. Not so much for those shopping now or in the next few years.

For 2023, interest rates are rising, so consumer demand will decrease, even if new and used car prices drop. Industry problems with getting new cars off the production line and into dealerships won’t be solved in 2023. As for electric cars; lithium, nickel, and cobalt are crucial elements of electric car batteries, and their prices have skyrocketed, which means electric vehicles prices will be impacted by growing material costs.

If you don’t need a car right now, be patient and maintain your vehicle you have.

There is so much more to discuss on this, put your comments below and let’s start the conversation.

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Lauren Fix, The Car Coach is a nationally recognized automotive expert, media guest, journalist, author, keynote speaker and television host. A trusted car expert, Lauren provides an insider’s perspective on a wide range of automotive topics and safety issues for both the auto industry and consumers. Her analysis is honest and straightforward.