The U.S. auto market is upside down right now and here’s why
In the “weird, but true” category, auto consumers are running into a unique but pricey issue when buying used cars — it’s cheaper to buy the same model new rather than used.
That’s the outlook from a new study by Jerry, a car insurance savings app.
According to the report, Despite used car prices cooling down, lightly used versions of seven of the 10 best-selling vehicles in America are still worth more than the sticker price on comparable new 2022 models.
Among the 10 best-selling vehicles in the U.S., the following lightly used 2021 models are worth more than the sticker prices on new 2022 models:
Toyota RAV4 ($5,900+)Honda Civic ($5,300+)Honda CR-V ($3,800+)Toyota Camry ($3,200+)Nissan Rogue ($3,100+)Toyota Highlander ($210+)Ford F-Series ($100+).
That’s slightly down from nine of the 10 best-sellers Jerry tracked in June, “indicating the worst may be over, even though the market is still far from normal,” the report stated.
Additionally, three of the top five best-selling EVs from 2021 are now worth more lightly used than the sticker price on comparable new 2022 models. These models include the Volkswagen ID.4 ($6,300 more), Tesla Model 3 ($5,200), and Ford Mustang Mach-E ($5,200).
Here’s Vehicle Prices Look Like This
Overall, the pace of annual price increases for used cars has slowed this year, and that’s welcome news for car buyers. According to The Bureau of Labor Statistics, used car prices rose 6.6% in July from the previous year, and down from a mammoth 41% price rise in February 2022.
So why the price flip between new and used cars? As usual, delays in building new vehicles are a big problem for buyers.
“Because of the chip shortage and other disruptions, many car manufacturers, including Toyota and Honda, have cut production despite strong demand, resulting in fewer new cars on dealer lots and longer wait times for delivery,” analysts noted in the Jerry report. “This has driven up the prices of both new and used cars.”
According to Edmunds, 82% of people who bought a new car in January 2022 paid more than the MSRP, compared to just 2.8% a year earlier. “Others turned to the used car market — and many are paying more than the list price of a new one,” the study added.
With high demand and low inventory in play, don’t expect much to change anytime soon in the new and used auto markets.
“Manufactures stopped producing cars when the world shut down due to Covid,” said Mano Yeghikian, chief executive of RDB LA and RDB Car Club. “This mass shutdown led to a rise in used car prices. Just like all industries, low production leads to high demands which leads to a massive jack-up in price.”
For the few new cars that dealers had in stock, demand was so high that some dealers tacked on what the auto industry calls “ADM” (Additional Dealer Markup).
‘These markups ranged from several hundred to tens of thousands of dollars, depending on the vehicles and the demand for them,’ said Richard Reina, product training director at CARiD.com, an aftermarket auto retailer.
The end result? A gently used one or two-year-old car became worth more than its initial MSRP (Manufacturer’s Suggested Retail Price).
“For example, if a 2021 model year car was bought new for $30,000, that same model 2022 vehicle, if it could be found in stock on a dealer’s lot, might fetch $35,000 with a $5,000 ADM,” Reina explained. “A desperate buyer, faced with a choice of paying five thousand dollars over sticker price or buying a slightly used one for $31,000 ($1,000 over its initial new price) might opt for the used car.”
Even more problematic is the buyer who can’t find their new car of choice at any price, and is left with no option other than to buy used. “Sellers have recognized this and have raised their asking prices accordingly,” Reina added.
The good news is that it’s “definitely” a temporary situation, Yeghikian said.
“We’ll see a massive drop in used cars this year and a drop-in brand-new cars by next year,” he added. “The supply chains have revved up their engine and once they are inventory again we will see a decrease in prices across the board, especially for used cars”
Consequently, if you’re looking for a vehicle, Yeghikian suggests holding off a few months. “Also, if you have the option to buy out your lease right now is the best time to do that,” he said.
Three Tips for Anxious Buyers
If you need to pull the trigger on a new or used vehicle now, take these tips with you.
Do you really need the vehicle? New auto consumers should ask themselves, “how badly do I need a replacement car at this time?”
“If your car was just totaled in a wreck then of course a replacement is warranted,” Reina said. “However, if your current car is in good condition, and can be kept road-worthy with just routine maintenance, weigh your options and consider holding onto their current vehicle for another year or two.”
Be flexible. If your mind is set on “Brand X”, reconsider that, and broaden your shopping search among a greater variety of makes and models.
“The more open-minded a shopper is, the more likely that they will find an acceptable vehicle at a dealer,” Reina said. “You can also order a vehicle rather than trying to buy one from a dealer’s existing inventory. If you can wait four to eight weeks, special-ordering allows you to spec the car with only the options you want.”
“Ordering one to be built for you also gives you more negotiating power with the dealer regarding pricing,” he added.
Take precautions with used vehicles. When shopping for a used auto, consider all the options.
“Factory CPO (Certified Pre-Owned) cars, sold only at authorized dealers, are probably the number one choice when buying used, but there is a premium to be paid,” Reina noted. “Also, consider buying privately. Websites like Facebook Marketplace have taken off as extremely popular places to shop for used cars.”
“While you’re at it, spend the money for a vehicle history report like Carfax or AutoCheck for some peace of mind,” Reina added.
