When will used car prices drop?
In KPMG’s recent 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 to the last quarter of 2023. At least one of KPMG’s scenarios (continued low supply and high demand) has the potential to see used car prices climb even higher before lowering.
So, yes, you can expect price drops, but expect a slow deceleration, unlike the rapid increases the used car market has seen.
Of course, further disruptions could accelerate price declines or bring them to a screeching halt. If rapid increases in interest rates are accompanied by a return of new car production by automakers to previous levels, prices could fall rapidly. On the other hand, if shortages persist, it could be a long time before prices come down significantly. Further plant closures due to parts shortages or the continuation of the pandemic could worsen the lack of new car inventory, which is then reflected in the used vehicle market.
“JD Power is starting to see some early production improvements, which should continue into the second half of this year.” said Paris. “However, despite improved new vehicle production, retail inventories on the ground remain extremely tight, which will keep new and used vehicle prices high throughout 2022.”
How much will they drop?
While used car prices are likely to fall, there is no consensus on how much or how fast. The new price floor will probably still be a long way off, even if prices start falling rapidly. Buyers who had remained on the sidelines will re-enter the market and their demand will slow any decline in prices.
If you’re hoping for pre-pandemic prices, you shouldn’t hold your breath. Even without market disruptions, the used car market would have seen natural price increases, much like new car prices have slowly increased over the decades. The floor price of the used car market will naturally be a bit higher in 2023 than it was in 2019.
Prices and interest rates
Even if used car prices go down, the total cost of ownership of a used car may go up. Indeed, interest rates, which have reached historic lows, are climbing rapidly as the Federal Reserve tries to contain 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 life of the loan. That makes the actual cost of the car $22,100. With a 6% auto loan, you’ll pay $3,199 in interest, or $23,199 over the life of the loan. That’s about $1,100 more than the 4% financing.
Will the prices of some cars drop more than others?
According to JD Power Valuation Services, any price drop we see in the used car market will not be evenly distributed across vehicle segments.
“If we fast forward to 2024, JD Power expects some of the biggest declines to be seen in the most overheated segments right now,” Paris says. “These include small, compact and medium-sized passenger cars.”