Why Are Used Cars So Expensive Now?

The used car market has changed drastically over the last few years, to the point where used cars can cost as much or more than new cars. So why are used cars so expensive now? The reasons are numerous, and it’s important to understand how they affect your ability to find affordable cars before you begin shopping. Use this article as your guide to understanding why used car prices have gone up so much in recent years, and make sure you don’t overpay for your next used vehicle purchase!

With no government restrictions on what sellers can charge if you’re scratching your head wondering why it seems like used cars are so expensive now, you’re not alone. With supply down and demand sky-high, one estimate finds used car prices 42% higher than in pre-pandemic conditions (source). Economics, supply and demand, and intertwined car markets make it easier to understand what’s going on.

Economics 101: Supply and Demand

We’ve got answers for you if you’re wondering what’s going on with used car prices! It all goes back to that Econ 101 course you took or skipped or slept through in school. It’s pretty easy to understand supply and demand.

To begin with, let’s look at supply. If the market is oversupplied with a product and demand stays the same, sellers will lower prices to get rid of it. Conversely, if supply decreases but demand remains the same, prices will increase since people are willing to pay more for something that is scarce.

As sellers try to get rid of their excess inventory if demand goes down for some reason and supply remains the same, prices will go down. People will be willing to pay more if demand for a product increases and supply remains the same.

The Pandemic Recession Decimated the Used Car Supply

There was a moment, following the spread of the novel coronavirus and COVID-19 pandemic when it felt like everything ground to a halt overnight. Our economy, most significantly, had almost shut down. Not many people were shopping for cars, new or used. Even at that early stage of the pandemic, it was apparent that demand had been dented. And if the supply of cars had stayed the same, prices would have gone down as prices rise as supplies decrease and demands stay the same. Hmm…What is this?

As a result, the supply of used cars went down and as the supply went down, the price went up. So one of the major sources of the supply of used cars comes from when they are traded in. According to NADA, these are the major contributors to the supply of used cars in the US.

the percentage of trade-ins on new vehicles is 41.6%

from trade-ins of used vehicles, 23.7%

wholesale auctions accounted for 27.5% of purchases

the remaining 7.2% came from street purchases and other sources

In fact, 65% of used cars come from vehicles being traded in. And with no one buying them, it makes it difficult to trade one in. If you want, then you’ll see that car dealers typically buy a quarter of their used car supply at wholesale auctions, but the auctions were all but dead during the height of the pandemic, and aren’t back up to the same levels they were before.

For example, the initial drop in demand from used car purchasers (in other words, downward pressure) has been compensated for by an increased demand and increased supply, which have driven prices even higher. But that’s just the beginning.

The Plot Deepens Due to a Disrupted New Car Market

Buying a new car and trading in an old one are tightly intertwined markets. As you just read, more than 40% of the supply of used cars is derived from people trading in their old cars. In this case, the supply of new cars was disrupted.

The economy began to open up again after the pandemic, and so did the demand for new and used cars. In the wake of the pandemic, global supply chains have been disrupted. One result is a shortage of semiconductors needed to produce microchips for cars. Due to a shortage of electronic components, automakers haven’t been able to produce as many new cars as they used to. Due to fewer trade-ins, there’s also a lower supply of used cars as well due to reduced new car supply.

In the meantime, those who were hoping to buy a brand new car are disappointed to learn they can’t get one and are willing to settle for a newer used car that is in high demand, thereby driving prices up even further. This just keeps getting worse.

Add to that that the demand for car rentals is also on the rise but car rental fleets weren’t buying new cars during the worst of the pandemic, and now They’re having difficulty meeting rental demand because they won’t be building up their fleets due to the new vehicle shortage. Furthermore, many car rental companies are also now trying to buy used cars to beef up their fleets, which has made the demand for used cars even steeper and puts an even bigger upward pressure on prices.

It May Get Worse Before It Gets Better

As these market conditions loop back on each other and intensify, how do you know that they are both interdependent and mutually reinforcing? Can you guess what the main source of all this inflationary pressure is? It’s all about cars, new and used, and of course, this situation won’t last forever, but things may get worse before they get better. Because the semiconductor shortage won’t miraculously disappear overnight, and also because used cars will be in short supply as long as new cars are in short supply.

The Silver Lining in This Whole Mess

You can, however, get more money for your used car right now than you ever thought possible if you want to take advantage of this whole perfect storm. You can see what we’d pay for your car if you get a Driveo quote. Used car buyers are snatching up used cars with record-setting quotes and competitive offers.

Long-Term Options

You have 30 days to shop around and see if someplace else offers you a better deal than Houston Direct Auto. Houston Direct Auto quotes are prepared by real people who do real market research, not algorithms pulling data from who knows where. If they do, we ask that you give us the opportunity to beat them by uploading an offer. With Houston Direct Auto, you get a fast, transparent, and safe way to sell your car quickly, and right now with used car prices higher than we’ve ever seen, You might get a great deal more often than you bargained for. Houston Direct Auto quotes are available now, but these market conditions won’t last long.