Are used car prices here to stay?

I know, I know, this isn't an economics forum. But I'm curious to hear some other peoples' opinions. Do you think the increase in used car prices we've seen this past year is permanent? Are elevated prices here to stay, or do you think this is a bubble? 

Personally I think (hope) that as supply of new cars increases over the next couple years and that we'll see used car prices come down, but I don't think they'll ever go back to where we were in 2019. For now I'm resigning myself to just shoving money into a bank account and closing my eyes. I hope 2023 gets better.

I suppose I have to actually work on these project cars in the garage now... 

Yes, it's a bubble.

OTOH, if one truly believes that it's permanent, they could bet on that by borrowing a bunch of money to lease as many vehicles as they dared, buy back the cars at the end of the lease term, and sell them for a crazy profit.

Interestingly, leasing hundreds/thousands of cars just to stick them in a warehouse for three years would artifically inflate used car values by making new cars more difficult to buy.

See, it's reasons like this why it's good that I'm not a billionaire.

It's a bubble.

Who's going to pay inflated prices for used cars when new ones become available?

I do this for a living.

The catalyst for used car prices returning to normal will be a steady supply of (discounted) new cars. We'll likely begin to see that this Summer, though I don't expect used car prices will return to "normal" until 2023, at the earliest

Mr. Peabody said:

It's a bubble.

Who's going to pay inflated prices for used cars when new ones become available?

^This

Many low mile less than 3 year old used cars are selling for over the new versions MRSP right now because they are available. Same reason new car dealers are able to charge a market adjustment price above MSRP. 

When the supply chain corrects and we have a surplus of new cars, I think it will correct some, but i also think a part of it is inflation which is probably here to stay. You cant almost double the money supply over the course of the last year and expect to not see things like this.

In reply to Opti :

Agreed. With inflation used car prices will go down, but never back to what they were.

This makes buying Challenge priced cars even more of a challenge....

Yes and this can also be applied to the absolutely insane collectors cars market too. It has been eye opening to watch/track. 

I don't think it's a "bubble".  A bubble is a market where prices are driven up by speculation and a "greater fool" theory, rather than by market fundamentals -- tulips, dotcom stocks, and some might argue crypto currency.  This is important because these things are only in demand because people expect the price will continue to rise and once something happens to damage that confidence the bubble pops.

Right now the rise in used car prices is driven by a lack of supply.  New cars and used cars are economically interchangeable (people will buy one in place of the other based on price), and normally the supply of new cars produced balances out the number of used cars that get junked due to crash damage or age.  Covid has reduced the production rate of new cars, but now that everyone's out driving again they're still using up older ones at the normal rate, so the total supply of cars in the market is going down.  Reduce the supply but increase the demand and prices go up.  I'm sure there's *some* speculation going on, but the primary driver of these price increases is structural.

Fixing new car production will keep the shortage of cars from getting any worse but we're still left with a deficit of used cars compared to "normal".  If it's fixed in 2022 then by 2025 we will still have a reduced supply of 3-5 year old used cars, because the production of 2020-2021 model year cars was so much smaller.  Automakers will likely produce at a higher rate than normal immediately to meet some of the deferred demand, but that can't make up for the huge number of cars that are "missing".

So I expect that fixing new car production will give a small reduction in the prices of used cars, but that the rest of the reduction will happen gradually over time as the 2020-2021 tranche of used cars ages out of the market.

This all assumes that everything else in the car market stays the same.  Things like long term changes in how many people are working from home  could cause structural changes in demand for cars, and the ongoing conversion to more and more EVs is likely to have effects as well.

Edit:  All of the above is in constant, inflation-adjusted dollars.  Inflation is a real thing, but IMHO is better thought of in terms of an increase in the supply of (and thus decrease in value of) money, rather than an increase in prices.  We measure it with prices, but when those go up due to changes in supply and demand of that particular product that's not "inflation".

What happens if the government starts really pushing EVs and the consumer doesn't want them quite yet? The dealers could be filled with expensive lease deals on EVs and the consumer who doesn't want an EV will be forced into the used market. Those car prices won't be going down anytime soon.

In fact, some in the government really want to make private ownership of cars too expensive for all but the wealthy.

https://ca.news.yahoo.com/uk-inches-closer-eliminating-private-180000325.html

Lol, this was in my recommended articles list this morning.

https://www.roadandtrack.com/car-culture/amp38595024/used-car-market-will-crash/

I think things will not rebound or go back down quickly.  A few reasons.  

Carvana has a ton of inventory that they paid too much for.  They will want to keep the prices high.  I just use them as an example.  But, additionally, dealerships have resorted to market adjustments and they'll want to continue that practice as long as they can. Why wouldn't they want to see prices stay high.  Their counterpart to that action will be the manufacturers.  

Lets say that every F150 retails for $5k over sticker.  Dealership stand to make $5k more.  How soon before Ford itself realizes that they could raise the MSRP by $3k leaving the dealer to maybe have to drop to a mere $2k over retail.    That is still a combination of $5k over old MSRP. 

I realize these are incomplete thoughts but my belief is that there will be much resistance on the sales side to reduce the cost of buying a vehicle. 

Also remember we are less than 30 days away from the annual used car price hike...tax return money!  Every year, used car lot advertising spikes (and probably prices too) when it's know that many people will have a few thousand extra rolling around their personal bank account.  That season seem to run until early May.  So, I expect no price relief in the next 6 months.  Something, might just begin to change in June but I'm not betting on it.  

In reply to John Welsh :

Prices can be sticky, but once inventory goes back up, and one dealer buckles on price, there may be a rush to the exits.  I'm not saying that we'll be seeing great bargains all of a sudden, but unless there ends up being massive collusion to hold prices up, they will drop (relative to inflation) once cars start sitting on lots again, and the dealer principal needs to make payments on their mansion, yacht, lakefront home, etc.

Nope. It's here largely to stay. 
 

As new car production begins to build, they will be pushing new markets. The obvious one is EVs. 
 

I'm not whining about EVs, but the price point is higher. 
 

Used car buyers buy used primarily because they want lower prices. If the average new car price pushes up (as it will with new and emerging markets), the demand for used vehicles will stay high. 
 

Plus, everyone is currently buying at inflated prices, and no one like to lose money. So, when existing used cars (being purchased at a premium) re-enter the market, they will maintain their inflated prices as best as they are able to. 

John Welsh said:

Also remember we are less than 30 days away from the annual used car price hike...tax return money!  Every year, used car lot advertising spikes (and probably prices too) when it's know that many people will have a few thousand extra rolling around their personal bank account.  That season seem to run until early May.  So, I expect no price relief in the next 6 months.  Something, might just begin to change in June but I'm not betting on it.  

Yeah, I'm really hating that, as I'd like to be picking up both a challenge car and an SUV for a future adventure right now, and am debating on what a "good" deal is right now versus should I wait to summer and see what happens.

I think it is a big assumption that things will get back to "normal". 
 

I think this is the new normal. Manufacturers will continue to make profits on lower production numbers, and cars won't be sitting on lots. 
 

SV reX said:

I think this is the new normal. Manufacturers will continue to make profits on lower production numbers, and cars won't be sitting on lots. 

Nah.  You can't keep prices high by artificially constraining supply without collusion between the manufacturers and there's no way to make that actually stick (as in be a legal contract) without provoking the ire of the anti-trust divisions of a half-dozen governments.

In reply to SV reX :

I agree with your sentiments!  

If not out-right collusion but lets just call it "market forces" or "market climate".  

Used cars are a function of new cars.  If new cars have higher retails, like EVs do, then used cars will have higher retails too.   

It may be possible that a car continue to loose 40% of its retail value at the 3 year mark.  So, a $20k vehicle is worth $12k after 3 years.  But the price of an average car is rising fast so now $40k is worth $24k after 3 years.  That will make it harder to find that $12k car...or a $6k car that has life left in it. 

In reply to codrus (Forum Supporter) :

Right. 
 

But no one is stopping chip manufacturers from shifting their resources to make chips for consumer electronics (in high demand because of COVID) instead of cars.

The "collusion" is a market driven one in the manufacturing of necessary components. 
 

It's not artificially high prices. It's the new normal prices. 

The US inventory to sales ratio is at an all time low. Less than 0.5. October was 0.39. Normally, it's over 2.4. 
 

From 2015-2019 manufacturing exceeded 90 million cars per year. 2020 was more like 70 million. 
 

So, if 2020, 2021, and 2022 were all down by 20 million units, that would mean the market will be short 60 million units. 
 

If manufacturing production rates  went back to "normal" overnight, they would have to produce 20 million extra cars per year for 3 years just to catch up with the loss. That would not account for any growth at all. 
 

I don't believe we will have the manufacturing capacity or healthy supply chain required to build 20% more per year annually for a very long time. 
 

Basically, we will never catch up with the lost production. Therefore, used car prices will remain high. 
 

My $0.02

In reply to SV reX :

Looks like Texas Instruments is building a few new semiconductor plants to take care of the high demand and strengthen the supply chain by making more chips in this country. The chip shortage might actually go away in a few years.

https://techxplore.com/news/2021-11-texas-instruments-billion-semiconductor-chip.html

In reply to Snowdoggie (Forum Supporter) :

That would be very nice. Ford is also talking about building a semi-conductor plant. 

They still needs to make up for lost production before used prices can come down. 

In reply to SV reX :

You are probably right about prices staying high for a few years. It is nice to know that some people are actually re-thinking the idea of spreading supply chains all over the world. There are advantages to bringing more of this back home.