It’s a tough time to find a used car or truck, maybe the toughest ever, and that’s because the market is experiencing what a leading auto industry economist calls “the perfect storm meets the perfect drought.” That is, a perfect storm of consumer demand is running headlong into a perfect drought of used vehicles in dealer inventories, says Tom Kontos, chief economist for KAR Global, a wholesale used-vehicle auction firm.
Higher-than-ever used-vehicle prices are the inevitable result. In fact, in the current supply-and-demand environment, it’s a challenge just to find the exact car or truck buyers want, let alone get a good deal on it. Prices rose 6.9% from December to March alone, according to data from online, new- and used-car marketplace CarGurus Inc.
More details on the big economic picture and how long these high prices might last are below. But first, some practical ideas from used-vehicle retailing insiders on what to do about it.
Looking For A Used Car in 2021?
For consumers, analysts have some commonsense pointers that should help buyers:
Cast a wide net. Using online shopping tools, it’s easy to increase the distance you’re willing to search, to see what used cars and trucks are available outside your immediate area, or even out of state, said Nick Woolard, a senior director of analytics for TrueCar, one of those online sites. Certified Pre-Owned programs offer some additional peace of mind when purchasing a car remotely or online, and a good deal or finding the exact right vehicle may offset shipping costs.
Think small. Used-car prices are up across the board—on average, around 26% vs. a year ago, analysts said. Used pickups are especially scarce relative to demand. In March 2021, some 2018 Ford F-150 pickups cost nearly $10,000 more than a similar 3-year-old model cost a year ago, according to Manheim, another used-vehicle auction firm. Prices are up less sharply for small cars and small crossover SUVs.
Be patient. Recognize it may take time to find what you want. “We do not see a magic bullet or tricks for getting around the current pricing environment,” said Stephanie Brinley, principal automotive analyst at analytics firm IHS Markit. “Our best advice would be to give yourself longer for the shopping process and recognize it will take time to find the best intersection between what a consumer wants to buy and the budget they have allocated to the purchase.”
Be prepared to buy today. Having said that, if you find what you want, you may need to act quickly before it’s gone. Check out your credit rating in advance and get pre-qualified for financing. Even when prices aren’t this high, it’s always better to go into the process with a realistic idea of how much loan you can qualify for and afford.
Be flexible on lower-priority “wants.” With inventories low, shoppers might have to compromise on color, mileage, or features, said Matt Smith, deputy editor for CarGurus Inc. “Determining needs vs. wants will help increase the number of applicable vehicles within a search radius,” Smith told Forbes Wheels.
Check out return policies. You can reduce the risk of a hasty purchase by taking advantage of used-car marketers that offer return policies of seven days or even longer. Those include online-only outlets like Carvana or Vroom, plus a growing number of dealership groups now offering digital sales, like Lithia Motors’ online channel, called “Driveway.” Earlier this year used-car giant CarMax extended its seven-day return policy to 30 days.
What Goes Up May Not Come Down For Awhile
Conversely, one common tip—simply to wait a while, until prices come down again—might not apply this year. In a normal, pre-Covid year, used-car demand and used-car prices typically hit their peak for the year in the spring tax refund season, with prices normally falling by early summer.
This year, with government stimulus checks, on top of tax refunds, on top of pent-up demand for used cars, on top of higher household savings rates, Spring 2021 is shaping up to be the biggest “spring bounce” ever, says Jonathan Smoke, chief economist for Cox Automotive, Manheim’s parent company.
Smoke said it’s hard to predict, but he expects used-car prices to at least somewhat follow the usual seasonal pattern and come back down a bit later this year. But he also expects high demand, low supplies and high prices to persist throughout 2021.
“We do not see any signs of the extreme demand-favored imbalance changing, at least before this summer,” he said in a press conference in early April. “Tight supply is getting even tighter, and demand is about as stimulated as you could imagine was possible.”
So how did used-car prices get so high? Just about every major source dealers and wholesale auctions turn to for sourcing used-vehicle inventory dried up in 2020:
- The trade-ins that dealers take towards the purchase of new vehicles, because new-vehicle sales fell 14.5% in 2020
- Former rental cars, because air travel was sharply curtailed last year due to Covid-19, rental car companies slimmed down and far fewer ex-rentals are entering the used-car market in 2021
- Off-lease vehicles that customers turn in at the end of a lease, because many customers extended their leases during quarantining rather than visit a dealership, and because more lease customers are buying their vehicles at lease end, instead of turning them in.
- Repossessions are down, too, partly because government support in terms of unemployment benefits and stimulus packages has helped people make their payments, and because many lenders made it easy for borrowers to extend loans and postpone payments, rather than repossess their cars.
Between sources drying up and the temporary shutdowns last year, KAR Global sold 3,062,000 used vehicles in 2020, down 19% from 2019, the company said in its annual report. In the first quarter of 2021, KAR reported on May 5 its ADESA auto auctions sold 753,000 vehicles, down 13% from a year ago.
“The root causes vary, but they all originated in the Covid-19 pandemic,” said KAR CEO Peter Kelly, talking about low inventories, in a conference call.
As noted, Covid-19 helped depress the supply, but the rebound from the pandemic has also stoked demand.
Economists note that U.S. consumers have money to spend. There’s a higher savings rate, if only because there have been fewer things to spend money on, like air travel, or eating out, or commuting to work.
At the same time, Covid has also made people want their own vehicle more than ever, as opposed to potentially risky public transportation or ride-sharing. “There’s real demand for private mobility coming out of Covid-19,” said Kevin Roberts, director of industry insights and analytics at CarGurus.
A Seller’s Market
Analysts interviewed for this story also point out that high used-car prices aren’t entirely bad news for consumers. If you’re selling a trade-in, or selling a used vehicle outright, chances are it’s worth a lot more than it was pre-pandemic.
“For consumers, used prices are up across the board. However, the good news is that they likely have even more equity in their trade-in, which should help balance out the higher prices that they will be paying,” David Paris, an executive analyst at J.D. Power told Forbes Wheels.
“Nice, clean used vehicles of all shapes and sizes are in demand right now and they can certainly capitalize on this market,” Paris said. “Additionally, something to consider: if a household has an extra vehicle they no longer need, now might be a great time to sell it.”