By most accounts, the auto industry has rebounded pretty well from the Great Recession, which means that a lot of American consumers have bought new cars in the past several years. Since it’s typical to get rid of the old car when buying a new one, you would think that the used market would be flooded with used cars in need of a new home.
Most consumers (and economists) aren’t complaining that the auto industry is doing brisk business, but the trickle-down affects buyers who depend on bargain-priced used cars. The problem for some buyers is that those used cars just aren’t as cheap as they once were. It used to be easy to open the newspaper or browse Craigslist and find a used car around the $5,000 mark. Used car ads these days paint a different picture — average prices are much higher and the really cheap options are few and far between. This trend has been going on for the last few years, but depending on when you’ve shopped, you might have noticed it only recently. According to Edmunds, average used car prices hit a peak of $18,600 last year, and that doesn’t leave a lot of room for the $5,000 outliers. Let’s take a look at some of the reasons why the car industry’s strong sales mean bad news for shoppers of used cars.
There Are Still Used Cars out There
Of course, the option to buy a used car instead of a new one still exists. Shoppers who are limited to pre-owned cars, due to budget limitations or other reasons, aren’t completely out of luck — there are still plenty of used cars around. After all, all those used cars need to go somewhere when they’re kicked out of the garage in favor of a newer model.
The most likely explanation is that more consumers have recently decided to trade in their old vehicles to the dealership instead of selling. You tend to get less money for your car this way, but it’s also much less of a hassle than selling privately. These cars generally end up on the dealership’s used lot after a quick mechanical once-over and maybe a good cleaning job, and the dealership expects to make a hefty profit. Cars that are traded in but aren’t nice enough for a spot on the lot (in other words, cars that would have sold cheap) are typically sent off to auction without a second thought. In other words, there isn’t actually a shortage of used cars on the market, it’s just that they’re on dealer lots instead of in peoples’ driveways.
New Cars Are Sometimes More Affordable
Buyers on a firm budget who can’t find a decent $5,000 used car might have another option — buying a new car instead. It seems counterintuitive, but the monthly payment on a new car could be much less than many shoppers expect. When auto manufacturers are trying to move big quantities of specific models, they sometimes offer financing deals as low as 0 percent — in other words, they’re basically lending qualified buyers money for free. Remember, interest payments add to a new car’s cost without actually adding to its value, but if the financing companies are loaning you money for free or cheap, you can save a bundle. Such offers can, in extreme cases, actually make new cars more affordable than comparable late-model used ones.
Used cars rarely get this kind of attention, which means that financing a used car is often more expensive than financing a new one. A new car and a used car that have similar monthly payments will look much different when a low-interest loan is slapped on the new car, and several percent more is added to the used one. A notable exception is if the dealer has excess stock of recent lease returns or late-model certified pre-owned cars. However, these types of used cars will already be well out of budget (to a buyer looking for a $5,000 car) and a mediocre financing deal really isn’t going to help.
People Might Be Keeping Their Old Cars
As mentioned above, a lot of people are buying new cars now or have bought them recently, but that’s not the same for everyone. Analysts point out that, at the height of the recession, people held onto their cars longer. Then when the economic recovery began, people bought new cars and sold or traded in their old ones. But what some consumers may have discovered during that time is that hanging on to a car for a few more years really isn’t a bad thing. Today’s cars are built for safety and longevity, and even when they’re past their prime they typically get the job done.
Cars Are Simply Worth More Now
New technology, particularly the kind that results in safer cars, drives up prices. Today’s used cars are safer than those of a decade ago and, as a result, it makes sense that they’re worth more. As an example, by 2018 all new cars sold in the United States are required to come with standard rearview cameras. That means basic subcompacts, the kind you can pick up new for $13,000 or so, will have not only a rearview camera but a display somewhere on the dash, which very few of them currently provide as standard equipment. This is likely to drive up new car prices at least somewhat and, in a few years when that car is ready for its second owner, it might hold more of its value. If this is the case, this trend will likely be reflected in higher average prices across the entire used car market.
We’re using an example that might play out in the future, but that scenario can be applied to plenty of other new features that have been introduced or become more common in the past several years. A $5,000 used car, regardless of what it is, has seen a lot of depreciation over its lifetime. If newer cars generally depreciate less, we will see fewer of them ever hit that price point.