In the recent KPMG report, they illustrate four scenarios for the market to return to more normal conditions. They have time horizons ranging from the fourth quarter of this year until the last quarter of 2023. At least one of the KPMG scenarios (continuing low supply matched with high demand) has the potential to see used car prices climbing even higher before they decline.
So, yes, you can expect price drops, but plan for a slow ramp down, unlike the rapid increases the used car market experienced.
Of course, further disruptions could accelerate drops in prices or bring them to a screeching halt. If rapid interest rate increases are matched with automakers’ production of new cars returning to previous levels, prices could drop quickly. On the other hand, if shortages persist, it could be a long time before prices retreat significantly. New factory shutdowns due to parts shortages or the continuing pandemic could aggravate the lack of new car inventory, which is then reflected in the pre-owned vehicle market.
“JD Power is beginning to see some early improvements in production, which should continue over the second half of this year.” says Paris. “However, despite improving new vehicle production, retail inventory on the ground remains extremely tight which will keep new and used vehicle prices high throughout 2022.”
How Much Will They Drop?
While used car prices will probably drop, there’s no consensus on how much they will fall, or how fast. The new price floor will likely be a long way off, even if prices start to drop quickly. Buyers who have been sitting on the sides will re-enter the market, and their demand will slow any price drops.
If you’re holding hoping for pre-pandemic prices, you should not be your breath. Even without market disruptions, the used car market would have seen some natural price climbs, just as new car prices have slowly risen through the decades. The price floor for the used car market will naturally be somewhat higher in 2023 than it was in 2019.
Prices and Interest Rates
Even as used car prices drop, the total cost of owning a used car may increase. That’s because interest rates, which have been at historic lows, are quickly climbing as the Federal Reserve tries to tamp down inflation.
Here’s an example: When you take out a $20,000 car loan for 60 months at 4%, you can expect to pay $2,100 in interest over the term of the loan. That makes the true cost of the car $22,100. With a 6% car loan, you’ll pay $3,199 in interest, or $23,199 over 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 drops we see in the used car market will not be evenly spread across all vehicle segments.
“If we fast forward to 2024, JD Power is expecting some of the larger declines to be observed in the segments that are the most superheated right now,” says Paris. “These include small, compact and midsize passenger cars.”