The prolonged inventory crunch of dealership lots is turning the U.S. used-car market upside down: Once-depreciating vehicles are rising in value, and some recently purchased ones are worth more now than their original price.
With car companies still trying to resume normal levels of factory output, dealers have been left with a scarcity of new vehicles to sell at stores, pushing many buyers into the used-car market where they are also encountering limited options.
Used-car prices rose 40.5% in January from a year ago, according to data released Thursday by the Labor Department, a jump that helped accelerate U.S. inflation to an annual rate of 7.5% last month, a new four-decade high. The steep rise in resale values is undoing years of depreciation on many older models and causing others to appreciate in worth in the months after being driven off the selling lot, according to industry data. “You see nutty things. Cars that were $25,000 new three years ago are $25,000 today,” said Adam Lee, chairman of Lee Auto Malls in Maine. “It doesn’t make any sense.” The supply of used cars also has been hit by fewer vehicles returning to the market off lease and rental-car firms holding on to their vehicles longer. The shift is another example of how the auto market’s recovery from the early days of the pandemic continues to defy convention as the supply-demand imbalance becomes more lopsided the longer the car-shortage drags on.
The higher used prices are also having a ripple effect throughout the car business, giving consumers more buying power when they trade in vehicles but also increasing costs for auto insurers and limiting the options for shoppers needing more affordable cars. Typically, a new vehicle loses a big chunk of its value within the first year of ownership and then continues to depreciate each year it is on the road with age, wear and tear, and higher mileage. Yet, for some consumers who purchased a 2020 or 2021 model-year vehicle within the past 10 months, their cars have steadily appreciated in value.
For instance, the average price paid for a new 2021 model-year vehicle in April was $38,585, according to J.D. Power. In January 2022—nine months later—that same model-year vehicle was selling for an average of $48,765 as a slightly used vehicle.
The trend also holds when a broader cross-section of model years is taken into account, including those bought before last spring. Before the pandemic, the first-year drop in value was about 33.3%, and then the car would continue to depreciate, at an average rate of 14% in each year after that, according to research firm J.D. Power.
Source: The Wall Street Journal