Used car market undergoing transition from volatility to stability

(November 16, 2023) SANTA MONICA, Calif. — The used vehicle market is experiencing a course correction after years of pricing volatility and other disruptions caused by early COVID-19-era supply chain setbacks. As highlighted in the most recent Edmunds Used Vehicle Report, the car shopping experts at Edmunds are witnessing encouraging signs of market stability, including a 5.5% year-over-year drop in used-vehicle average transaction prices, near-new used cars once again transacting at prices notably below brand-new, and new-car discounting trickling down to used cars of all ages.

"Q3 showed signs of a return to normalcy in the used car market, albeit at still-elevated prices," said Ivan Drury, Edmunds' director of insights. "Both dealers and consumers should benefit from the lessening of market turbulence as pricing and transacting can be handled with less risk that a vehicle's value will move sharply in either direction over a short period — as was happening throughout the past few years."

Edmunds analysts uncovered the key new trends shaping the used market in their Q3 Used Vehicle Report, including:

    •    The expected, substantial pricing gap between brand-new and near-new used vehicles has returned. No trend marks the return to normalcy in the used car market more clearly than used pricing sitting properly below new values. Improved inventory in the new-car market has resulted in downward pressure in the used market, leaving the average price for 3-year-old and newer used vehicles $13,686 below the new-car industry average price in Q3 2023. This was a much wider gap than in Q1 2022, when the difference was only $8,950.

2021 Ford Mustang Mach-E
   •    Used EVs are cheaper as new ones see price cuts: Dwindling demand for new electrics has led to significant discounting for the segment, adversely affecting residual values of those already on the road. While all 3-year-old or newer vehicles experienced a 4.8% decline in value in September 2023 compared to September 2022, EVs specifically have suffered a considerable 29.5% value drop.

    •    The list of the most and least depreciated used vehicles year-over-year offers more expected results: With seasonality returning and vehicles appropriately depreciating once again, we're seeing traditional market forces have their expected effect on used values. Among the most depreciated 2021 models year-over-year are EVs like Tesla Model Y and 3 and Ford Mustang Mach-E, whose resale values have been zapped by price reductions on new EVs and appealing lease deals. On the least depreciated end are 2021 models with limited supply or low levels of competition within their segment, including Toyota Tacoma and GR Supra and Chevrolet Camaro.

    •    Used vehicles are trending older by age and mileage, and are selling quickly: While some used-market trends are reverting to historical norms, readily available newer, cheap used vehicles have yet to return en masse. Vehicle age and mileage have increased for every price band on the used spectrum from Q3 2019 to Q3 2023, and the strong level of demand at all price points has vehicles moving from dealer to consumer at a quicker rate. Shoppers who bought a used car in 2019 would need to increase their budget by nearly $10K to obtain a vehicle of a similar age and mileage today.

Strategies for used-car shoppers

Because no two car searches look the same, Edmunds experts outline a number of shopping tips to help consumers navigate the used market:

    •    For the first-time used-vehicle shopper: If you've found yourself previously only purchasing new but are looking at used vehicles this time around, consider searching for vehicles by generation. While newer model years are typically the most desirable, you could lock in savings by expanding your model year and mileage limits to include older options within the same generation, which should offer a similar look and feel at a lower price point.

    •    For the used-car shopper wondering if Black Friday and winter holiday season shopping will bring deals to the table: In general, improved new-car inventory and discounting signify a good opportunity for used car shopping, as these encouraging pricing dynamics trickle down from the new to the used market. Edmunds analysts say that although Black Friday deals are typically aimed at new-car shoppers, new-car incentives can serve as a guide for identifying the largest discounts on the newest used cars.

    •    For the first-time EV shopper: If you've been considering an EV but are hesitant about long-term residual value, the used market could be a good option. Not only will you be avoiding the largest hit to an EV's residual value (the first few years of ownership), but most used EVs will still be within the federally required eight-year/100,000-mile battery warranty.

"Anyone attempting to compare today's used car market to the ‘Before Times' will likely wince at current values, but stability is nonetheless an encouraging sign," Drury said. "In the short term, consumers who have been on the fence should approach a used car purchase with more confidence knowing the auto industry has moved past its most significant production pipeline challenges to catch supply up to, and even surpass, demand."