Pre-owned vehicle values are ready to collapse. There’s currently no demand, which is being confounded by dropping consumer confidence. The lack of demand and freeze on public gatherings means there have been no vehicle auctions so cars are piling up. Especially vehicles coming off-lease. Rental car companies are selling inventory to stay afloat. They don’t need as many because only a small number of people are traveling. All of this means finance companies and auto dealers are going to be hit very hard. Experts say the used car market is already collapsing. Here’s what you need to know if you’re thinking about buying a car.
New car incentives are starting to ramp up. That means cheaper new cars which means more used cars turned in to add to the already huge amount of vehicles that can’t be sold. It’s a perfect storm hitting dealers right now.
Here’s what experts say will happen to the economy:
If there is a mild recession experts say:
A mild recession is already happening. A V-shaped recovery means that prices for used vehicles up to six years old will decline by at least 10%.
If there is a moderate recession:
Prices will decline from 14-19% in the next few months.
If there is a severe recession:
Currently, there are over 30 million seeking unemployment. That’s the highest rate since the depression of the 1930s. A slow U-shaped recovery from a severe recession would mean a drop in prices around 25%.
There is a risk of massive losses on used vehicles according to Automotive News. It sees these three reasons why we’re headed for a used car market collapse.
Record off-lease used car supply:
There will be a record of 4.1 million off-lease vehicles in 2020. There were recorded over 800,000 vehicle overflows as of last month. Rental car companies are also selling off vehicles adding to the glut of used cars. After 9/11 a similar scenario caused vehicle values to crash.
Damaged consumer confidence causing demand freeze:
With shelter-in-place orders in March, the freeze in consumer purchases was immediate and sharp. There will be further consumer confidence drops due to the unemployment situation. Some businesses won’t return which means what looks like might be temporary could be permanent.
One- to three-year-old cars will see further devaluation as new-car incentives see buyers trading in their vehicles. So there will be another wave of used cars once the incentives start rolling.
Right now dealerships are not restocking because auction prices have not had a chance to correct. As the backlog starts working through auctions the prices will determine the new normal for retail vehicle prices. So it is best to wait for the correction before considering a purchase.
If new truck inventories drop significantly due to factory shutdowns then there may not be much of a drop in used truck prices. That won’t be the case with cars and SUVs. Those experts are expecting an additional $1,200 to over $5,000 price reductions in the coming months.
The used car market is as unpredictable for dealers as it is for you
Dealers will run a fine line between making their new-car profit and losing it by giving more for trade-ins. So right now the market is as unpredictable for them as it is for you. The longer you wait means values will correct but that also means you have less of a chance of getting more from a dealer. It’s a balancing act for both you and the dealership.
Reduced prices from private owners may be one indication of value. We are already seeing this on sites like Car Gurus and Craigslist. Keep an eye out for rapidly falling prices on postings indicating an anxious owner. As long as you don’t need the comfort of a dealership warranty or service center you will find private parties selling the vehicle you want cheaper than a dealer.