Why Are Used Cars Worth So Much Right Now?
Over the past year, the used car market has surged. Across the nation, the demand for used cars has grown exponentially, making the trade-in value and selling price hit an all-time high. And while fluctuations in used car sales year-to-year are expected, the automotive industry has been unable to keep up with the increasing demands. According to the U.S. Bureau of Labor Statistics, the selling price for used vehicles has jumped nearly 30 percent between May 2020 and May 2021. Currently, the average price for a used car sits around a record-hitting $25,463.
This jump in value can be attributed to the shortage of cars as a result of the pandemic. Now with COVID-19 restrictions lifting, the demand for them grows daily. Because of this, used cars are now more valuable than ever. For sellers or those looking to upgrade to a new vehicle, this is an incredibly profitable time.
But, what caused the shortage in the first place?
To start, the pandemic impacted many professions, and the automotive industry was no exception. Global shutdowns directly affected the rental car industry, as well as new car manufacturing, creating a ripple effect on anything automotive-related.
The used car market depends on the rental car business and new car manufacturing.
Manufacturers cannot produce pre-owned vehicles. This means the used car market relies on different methods to generate its supply. One major contributor is the rental car business refreshing their inventories with newer vehicles. Normally, this is done every 12 to 18 months. However, when global travel bans started in March 2020, the rental car industry took a major hit. This caused many operators to rapidly unload their existing fleet without purchasing replacement vehicles. Without this consistent replenishing cycle, fewer cars entered the market.
Another way the used car market receives its supply is through customers trading in old vehicles for newer ones or turning over leased vehicles. However, with record levels of unemployment and financial insecurity, many drivers chose to stay with their current vehicle last year. Banks have also been more lenient allowing delayed car payments, which means fewer cars entering the market via repossession.
All this adds up to a significant amount fewer pre-owned vehicles ready to be resold. And while consumers were slower to buy cars in 2020, most of those who did chose to go the pre-owned route. According to data from Statista, there were nearly 3x as many used cars sold in 2020 as there were new cars sold.
The automotive industry can’t keep up with the new demand.
With cities reopening and the world slowly recovering, many drivers are eager to get back on the road. Flight travel bans increased the popularity of road trips in 2020, and it appears the trend will continue throughout 2021. The growing demand for both new and used cars can also be attributed to historically low-interest rates. This, on top of people receiving their stimulus checks and annual tax refunds, means more consumers are ready to make big purchases now.
While all these factors seem like a perfect recipe for automotive purchases, the current predicament is that there are 25% fewer used cars for sale now than there were last year, according to data from Cox Automotive. Along with this, there’s been a higher demand for them due to shortages created by the pandemic. According to Cox data, there was a 52% increase in used cars sold from early 2020 compared to that same period in 2021. With fewer cars to sell, but more buyers, the value of them increases.
So, why don’t people purchase new vehicles instead?
There’s also a shortage of new vehicles on the market.
Currently, there is a global shortage of semiconductor computer chips. These chips are used in cars for various reasons including calibrating fuel injection and running onboard entertainment and information systems. Newer vehicle models can have over 3,000 chips in them. Without the chips, the vehicle cannot be manufactured or sold. According to the U.S. Bureau of Economic Analysis, the inventory of new cars assembled in North America at the beginning of 2021 totaled 396,00, and it now sits at 254,800. Similar to the used car shortage, with fewer new vehicles, but higher demand, the value for them increases.
The silver lining is that this is a great time for those looking to sell or trade in their used vehicle.
With all factors considered, now is one of the most profitable times to sell or trade in your used vehicle. The current market conditions have made used vehicles thousands of dollars worth more than normally. If you’re curious to know how much your used car is worth, simply contact us and we’ll help you out.