In a recent KPMG report, they describe four scenarios for the market to return to more normal conditions. They have a time horizon from the fourth quarter of this year to the last quarter of 2023. In at least one of the KPMG scenarios (matching consistently low supply with high demand) used car prices have the potential to climb even higher before the fall.
So, yes, you can expect prices to drop, but plan for a slow ramp down, as opposed to a rapid growth in the used car market.
Of course, further disruptions could hasten the price drop or bring them to a screeching halt. If rapid interest rate increases are matched by automakers producing new cars returning to previous levels, prices could fall sharply. On the other hand, if the shortage persists, it may take a long time for prices to come down significantly. New factory closures due to parts shortages or a continuing pandemic can exacerbate the shortage of new car inventory, which then appears in the pre-owned vehicle market.
“JD Power is beginning to see some early improvements in production, which should continue into the second half of this year.” Paris says. “However, despite improvements in new vehicle production, retail inventory on the ground remains extremely tight which will keep prices of new and used vehicles high through 2022.”
How much will they drop?
While the prices of used cars will probably drop, there is no consensus on how much, or how fast, they will drop. The new price floor will likely be far away, even if prices start to drop quickly. Buyers who are sitting on the sidelines will re-enter the market, and their demand will slow any price drop.
If you are anticipating pre-pandemic prices, you shouldn’t be holding your breath. Even without market disruption, the used car market would have seen some natural price increases, as the prices of new cars gradually increased over the decades. The price floor for the used car market will naturally be somewhat higher in 2023 than in 2019.
prices and interest rates
Despite the decline in the prices of used cars, the overall cost of owning a used car can increase. That’s because interest rates, which have been at historic lows, are climbing sharply as the Federal Reserve tries to tame inflation.
Here’s an example: When you take out a $20,000 car loan for 60 months at 40%, you can expect to pay $2,100 in interest over the term of the loan. This brings the true value of the car to $22,100. With a 6% car loan, you’ll pay $3,199 in interest, or $23,199 over the course of 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 JD Power Valuation Services, any price drop we see in the used car market will not be spread evenly across all vehicle segments.
“If we fast forward to 2024, J.D. Power is expecting some big declines in the areas that are hottest right now,” Paris says. “These include small, compact and medium-sized passenger cars.”