Used-Car Prices Hit a 13-Year High

Not that long ago, if you asked someone which was more expensive, a used car or new car, the answer would almost certainly be the new car. Oh, how things have changed. In recent years, due to a variety of factors, in some instances, a used car may actually be more expensive than a new one. According to reports, used-car prices have reached a 13-year high.

Here are some historical trends leading up to the latest data. During the third quarter of 2009, used-car prices were at a record-low, costing roughly $14,808. But almost immediately, the used-car pricing showed an upward trend, crossing the $15,000 threshold for the first time during the fourth quarter of 2009.

Over the next couple of years, used-car pricing continued to show an upward trend, peaking at around $16,473 in 2011. After this point, prices began to drop. During the third quarter of 2013, the average cost of a used car was roughly $15,617. But, once again, prices started gradually increasing. Jumping ahead five years, during the first quarter of 2018, the price of a late-model used car peaked again. This time, the price hit a record-high $19,657.

What’s driving the increased used-car prices not only here in Columbus Ohio but other parts of the country as well? Here are a few factors.

Supply

Economics plays a significant role when it comes to increasing used-car prices, especially as it relates to supply and demand. However, the scenario is not your typical supply-and-demand equation. For example, it’s not only the fact there’s an increased number of used cars in the market, but also the condition and type of used cars consumers have access to. Additionally, though there is an increased supply of some vehicles, there’s a limited supply of others. In this unique used-car market, both scenarios are factors in why used cars are more expensive now than they have ever been.

An influx of off-lease vehicles has saturated the used-car market. More and more consumers are opting to lease vehicles because leasing provides attractive options. When leasing a vehicle, you are able to get the vehicle you want with the features and options you prefer, but you lack the high monthly payments new-car purchases usually present. You also have a reasonable down payment. Additionally, you are almost guaranteed low maintenance cost because the vehicle is new, general maintenance costs are usually covered by the lease agreement, and you have the benefits provided by the manufacturer’s factory warranty. Who would not opt to lease their next car? Very few people, apparently. As more and more people are leasing, once the lease agreement is up, the car then transitions to the used-car market. Since these are late-model vehicles, with limited wear and tear, they tend to be more expensive.

Another factor analysts noted is there are more pickups and SUVs in the used-vehicle market. Consumers are showing a growing preference for larger vehicles. Consumers are not as turned off by vehicles that are more expensive and less fuel efficient as they were in previous years. Higher selling prices for pickups and SUVs, coupled with a higher tendency to retain their value, means these vehicles are more expensive in the used-inventory market as well.

Just as the car market shows an increase in off-lease vehicles and pickups, as well as SUVs, it also shows there’s a decrease in the presence of other models. At one point, a vehicle lasting for more than 60,000 miles was an anomaly. Fast-forward to 2018 and the average vehicle is at least 11 years old with between 150,000 and 250,000 miles on the odometer. With consumers driving their cars longer, many of the vehicles that have saturated the market in previous years are no longer available. The higher demand for limited, or almost nonexistent, inventory drives up the price of used cars.

Demand

On the flip side of the economics coin is the demand variable. There are several prominent reasons why the demand for used cars has seen an uptick.

Though the economy is continually showing positive rebounds from the last recession, there are still some residual effects. One of those factors centers around consumers’ financial situations.

During the recession, many consumers lost their jobs, which started a domino effect as it relates to their financial well-being. Without a job, you’re unable to make payments, let alone timely payments, on your outstanding debt. With debt mounting and no or limited income, your debt-to-income ratio, unfortunately, tilts in favor of the debt. The end result is typically damaged credit and limited income for a down payment and/or monthly payment. Consumers facing this scenario tend to consider used cars over new ones.

It may seem somewhat odd to some people, but to analysts and economists, they also note that weather has had an effect on the increasing demand for used cars. During extreme weather-related events, such as the previous hurricane season the United States experienced, consumers in the storm-affected areas tend to purchase used vehicles more often when they receive insurance payments.

Finally, and it may be due in part to the hardships many people faced during the most recent recession, consumers are opting to be more frugal when it comes to making purchases, especially big ones, such as homes and cars.

Financing Options

When financial institutions finance any loan, there are a list of factors that are taken into consideration when determining your interest rate, down payment, and monthly payment. This formula applies to car loans, specifically used-car loans, as well. As a result, the overall purchase price may be higher, as it typically is for used cars. A lending institution tends to incur less risk when financing a new car in comparison to a used one.

When financing used cars, lenders consider such things as the vehicle’s age, the higher tendency for older vehicles to need repairs, the higher probability that a borrower will default on the loan, and the fact older cars are more likely to depreciate faster. Lenders pass along the uncertainty these factors pose to borrowers via higher interest rates, higher down payments, and shorter loan terms, which, when combined, lead to higher monthly payments. In a nutshell, used-car prices increase.

This is not an all-inclusive, comprehensive list of factors responsible for driving up the increasing prices for used cars. However, if you’re in the market for a used car, this is a good starting point. In addition, don’t overlook doing some firsthand research by visiting the local used-car dealerships here in Columbus. It will give you a chance to not only ask questions but also take a look at the vehicle inventory, as well as take a test drive.