Here's What Falling Used Car Prices Mean For You

Between the COVID-19 pandemic and related supply chain disruptions, the used car market has gone through a wild couple of years. Used car prices skyrocketed through the end of 2020 and early 2021, rising by 45% through the summer of that year, then they began plummeting, eventually experiencing the most substantial one-year drop since 2009. And that's mostly a good thing for car buyers.

Citing Edmunds.com Inc., which tracks vehicle information and inventory size, CNN illustrates the ups and downs:

Data from Edmunds shows the average price of a used car purchase in December at $29,533, down nearly $1,600 from the record high of $31,095 reached in April 2022. Today's average used car price is about the same as the average new car price as recently as 2010.

While the prices of late model used cars are down only 5% off their peak [according] to Edmunds, the price of older used cars, those five years or older, have fallen 15% or more from their peaks early in 2022.

According to experts, the decline in used car prices has come partly due to the rising expense of financing a car, thanks to rising interest rates. Additionally, CNN points out a warning from used car dealer CarMax, which says increased interest rates and higher prices damage the market because they reduce consumer demand.

The biggest problem, however, is that fewer new cars are available, and the reduced inventory of fresh out-of-the-factory vehicles boosted the used car prices. Greg Markus, an executive VP for AutoLenders, told CNN that "at one point, it seemed that everyone who was going to buy new ended up buying used."

As supply chain issues begin to resolve and automakers find it easier to acquire materials they need like computer chips, sales of new cars are improving, lowering used car demand. According to Greg Markus, declining used car prices had nowhere "to go but down."

The rise in pre-owned vehicle prices was a critical factor in the country's general inflation rate, contributing about one percent to rising consumer prices between April 2021 and May 2022. Now, in a reversal, it's deterring inflation, trimming a third of a point off the overall rate in December.

This is good for those seeking to purchase a used car, though it can have an adverse effect on some consumers by diminishing the overall value of the car they want to trade in. According to Edmunds, the average trade-in value in December dropped by nearly $3,000 from its June 2022 peak.

Trade-in value reductions are likely to keep car prices down in general since it will reduce what consumers are willing to shell out for a new ride in 2023.