The Counter-Intuitive Appreciation of Used Cars

New cars are expected to lose a significant amount of value the second they are driven off the lot. Used cars are not supposed to be investments. Even vintage or classic cars aren’t really appreciating in value so much as regaining value. Meaning they went through a time of massive value loss, then because there are fewer of them left and after lots of money and work spent in restoring them to immaculate condition, well, they still aren’t a good investment. But they technically have ‘gained value.’

But there is a curious bubble building right now that should at least grab your attention, if not make you consider some major decisions. The value of many used cars–not classic, nor vintage, nor extremely rare–regular used cars that were a dime a dozen just two years ago when they were new, has increased at nearly the same rate as the popular bitcoin NFTs and exceeding many increases in the stock market.

To be clear, this is not expected to continue for much longer. With that, there are decisions that warrant some consideration as the vehicle sitting in your driveway or garage right now might offer one of the best returns on investment you will have.

The Why…

There are two main reasons this jump or surge might be happening. Both are certainly “negatives” in the realm of commerce, but neither is showing many indications of recovery anytime soon.

Inventory

The past few years have placed an immense strain on everyone and everything. While we might be (hopefully) nearing the end, some effects have yet to reach their peak, and recovery may still take a few long years away. Perhaps one of the largest of those is the supply chain issues that you almost assuredly have already experienced.

Couple the shortage of inventory of imported automobiles over the last few years, as well as the chip shortage that has dramatically slowed the production of new vehicles, there simply is less supply for the same demand.

The best way to think about it is that a car doesn’t run unless it has all its parts. So a shortage in a couple types of parts can sideline a lot of cars.

While both issues are showing signs of a turnaround, it may take a bit of time yet for a full recovery from these.

Inflation

Inflation is a fickle economic indicator. In general, things cost more during times of inflation, but the cost of particular goods is not necessarily an indicator of inflation. In looking specifically at car values, the average price of both new and used cars has gone up drastically. This would seem like decent evidence for inflation.

However, the average value of used cars around two years old has jumped by 50%, with new car values seeing half that. Time will tell whether this trend continues or if the cost of vehicles begins to drop.

The Market

Not unlike many housing markets, the used car market is a seller’s paradise. If you have been considering selling your car, either to upgrade to a newer model or to downsize your family’s fleet, now might be your best time. As always, take some time to research to see how much your used car is worth. It won’t take long to see how the value has grown over the past two years.

Buying a Car

If you are looking to upgrade to a newer model, now might not be the best time, especially if you are committed to a used vehicle. Depending on your circumstances or why you are needing a different vehicle (growing family, perhaps), you might not have a choice. In this case, there are a few things to consider. First, if you can wait and “ride out” this wave, it might prove less of a financial blow if prices come down. Second, if you can’t wait, consider buying a new car. Yes, the average cost of new cars has also increased, but nothing compared to used vehicles.

What would cause the Bubble to Stay Longer?

Well, Governors like Jay Insley of Washington state keep announcing that new vehicles will be all electric (EVs) or Hybrids. In Washington’s case, the goal is to make this shift by 2035. They infrastructure can’t handle that now, and is unlikely to in 2035.

The effect of banning sales of new, non-EV cars in a state will drive the price up on used ICE (Internal Combustion Engine) cars.

How Big Will the Bubble Get?

Or, how long will it take for prices to go down? No one knows. This is unlike any other time where the market is “simply” based on the ebbs and flows of the economy itself. With the external influences at play, we may see recovery within a few months, or it may take a few years. In both cases, there can be a very steep slope in both directions. We may not have seen the peak of the value of used cars. On the other hand, if the bubble bursts, we may see such a drastic drop in prices that they will fall beyond where they started.

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