Aaron Turpen: Used Car Prices Are Nuts! When Is This Going To Change?

Cowboy State Daily automotive writer Aaron Turpen writes: "Probably the most-asked question right now, as gas prices finally begin to drop, is why used cars cost almost as much as new ones."

Aaron Turpen

August 24, 20224 min read

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By Aaron Turpen
Cowboy State Daily automotive writer

Probably the most-asked question right now, as gas prices finally begin to drop, is why used cars cost almost as much as new ones. “Used care prices are insane right now!” a friend told me as we discussed good options for his teenager’s first car. “My first car cost me $300 and was good all the way through college.”

Ya, well, this isn’t the 1990s anymore. My first mortgage was barely $500 a month and that was a decade later. Things are definitely not the way they were. My dad’s stories about buying his first car, cash money, for $3,800 and a first house for $9,000 were, well, unbelievable to me during my 20s in the 1990s when my rent was over $300 a month.

Now? Well, we’re looking at a generation that considers a new car priced at under $40,000 to be amazingly cheap. We could go into the economics of why this is, but that’d quickly become political. Everyone wants to blame someone when the reality is that everyone is in on it. So let’s talk about used cars.

Yes, used car prices are pretty insane right now. But “..the primary driver for the used vehicle market is, not surprisingly, demand,” said Steven Lang, a colleague and expert in used car markets. “Dealerships and sellers have a hand in creating the market,” he said, “but don’t necessarily control it. If it costs more to get the used car in order to resell it, the resale price will be higher.” Simple economics.

And that demand is high right now because new car prices are also pretty insane. The average new car is selling for about $40,000 today. That’s without any dealership markups or other costs added on. And that price is about to go up again, thanks to high inflation and the pass-through costs that will add on. Most automakers have already announced price increases for 2023 and 2024 models.

We currently have a market situation that is hitting consumers from several directions. New car prices are high, regardless of inflation, because that’s what the going rate is.

All of the safety equipment, added technologies, and higher costs of doing business have been piling into the cost of a vehicle for years now. The relatively simple (if battleship-sized) machines of the 1960s were lightweight deathtraps compared to today’s average crossover-SUV or truck and their heavyweight safety items.

To go with the added price of a vehicle just because of technology and inflation, we also have a shortage. Manufacturers still cannot get the parts they need, especially the control chips, and probably will face shortages for at least two more years. So the new car market will remain very seller-friendly and prices will reflect that. There are more buyers than cars to be sold.

The economic Reagan Effect for that is affecting used car markets. As more buyers are priced out or unable to find new cars, they trickle down to the used market. More buyers mean fewer cars per potential buyer, which raises prices.

As the demand for used cars has increased, demand to get more used cars to meet that demand has increased wholesale prices for those used cars. “The market follows the money,” Lang said. “With buyers cross-shopping new and used cars and often getting quicker to buy before it’s gone for fear of missing a deal, the market just keeps going up.”

The added effect here is that new car dealerships, with few new cars to sell, are generally making more with used car sales. Most new car dealerships have historically made a steady, but not necessarily high income from their new car sales.

Relatively speaking. For years now, most dealerships make much of their income from resale of trade-ins, from their maintenance and repair shops, and from after-sale dealer add-on products like accessories. And, of course, from the financial side of things via kickbacks from lenders and the like.

“We have at least two more years in this chip shortage,” Lang said. “That’s how long it will take for new chip makers to come online and for logistics to catch up.” That means two more years of high vehicle prices across the board.

That’s not good news for those hoping to see some reprieve in their used vehicle needs. We’ve got a ways to go yet.

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Aaron Turpen