Used car bubble? Consumers paying $10,000 more than in a "normal" economy.
Consumers are paying $10,000 more for to buy a used car than if the economy were "normal" and older vehicles were following the typical pattern of depreciation, according to a recent study from CoPilot, a car buying app.
The price premium for used cars rose to $10,046 above projected normal prices, according to a recent CoPilot analysis. The average used car price was $33,341 in June, although "nearly new" cars – those between one and three years old — rose 1% to an average list price of $42,314 in June compared with the prior month.
The analysis also found that the price of 1- to 3-year-old cars now fetch a record premium of $13,145 above "normal" prices.
A rule of thumb is that cars typically lose value as soon as you drive them off the lot, but the CoPilot study found that the pandemic is upending those dynamics. For instance, among all types of used cars, only 8- to 13-year-old cars depreciated in June, the study found. A shortage of new cars is pushing more buyers into the used-car market, which is leading to price increases for those vehicles.
"[T]he used car market overall still has a long road back to normal," CoPilot founder and CEO Pat Ryan said in a statement. "Despite a number of challenges facing the overall economy, the market has not softened to the degree that might have been expected."
Even so, there are some signs that the used-car market may be facing some headwinds, which could provide some relief for people looking to buy a car down the road.
Repossessions of vehicles are on the rise and have doubled among so-called "prime" borrowers, or people with good to excellent credit scores who are considered the least likely to default on their loans. On top of that, the Federal Reserve's recent interest-rate hikes, aimed at curbing inflation, could help tamp demand for car purchases.
Together, those trends could eventually help bring auto prices back to earth. If demand falls due to higher borrowing costs while supply increases as repossessed cars are resold, that could result in lower prices on car lots.
"These record high prices will not last forever," Ryan said.
That being said, Ryan recommended that consumers hold off on buying a car at the moment, given that used car prices are still rising. "However, if you're a used car owner looking to sell," he added, "now is the time."