Why Your Car Is Worth More Today Than When It Was Bought

Demand for used cars increased due to fear of becoming infected on public transportation and because people working from home needed another car or two. 

Meanwhile, supply chain problems, especially with chips from Asia, and other raw materials has caused declines in available new vehicles while their prices increased. The result is that traditional auto depreciation has become outmoded. JL 

Nora Eckert reports in the Wall Street Journal:

Used-car prices rose 40.5% in January from a year ago. The steep rise in resale values is undoing years of depreciation on many older models and causing others to appreciate in worth in the months after being driven off the selling lot. The prolonged inventory crunch of dealership lots is turning the U.S. used-car market upside down: some recently purchased models are worth more now than their original price. The average price paid for a new 2021 model-year vehicle in April was $38,585. Nine months later that same model-year vehicle was selling for an average of $48,765.

The prolonged inventory crunch of dealership lots is turning the U.S. used-car market upside down: Once-depreciating vehicles are rising in value, and some recently purchased ones are worth more now than their original price.

With car companies still trying to resume normal levels of factory output, dealers have been left with a scarcity of new vehicles to sell at stores, pushing many buyers into the used-car market where they are also encountering limited options.

Used-car prices rose 40.5% in January from a year ago, according to data released Thursday by the Labor Department, a jump that helped accelerate U.S. inflation to an annual rate of 7.5% last month, a new four-decade high.

The steep rise in resale values is undoing years of depreciation on many older models and causing others to appreciate in worth in the months after being driven off the selling lot, according to industry data.

“You see nutty things. Cars that were $25,000 new three years ago are $25,000 today,” said Adam Lee, chairman of Lee Auto Malls in Maine. “It doesn’t make any sense.”

The shift is another example of how the auto market’s recovery from the early days of the pandemic continues to defy convention as the supply-demand imbalance becomes more lopsided the longer the car-shortage drags on.

The higher used prices are also having a ripple effect throughout the car business, giving consumers more buying power when they trade in vehicles but also increasing costs for auto insurers and limiting the options for shoppers needing more affordable cars.

 

Typically, a new vehicle loses a big chunk of its value within the first year of ownership and then continues to depreciate each year it is on the road with age, wear and tear, and higher mileage.

Yet, for some consumers who purchased a 2020 or 2021 model-year vehicle within the past 10 months, their cars have steadily appreciated in value.

For instance, the average price paid for a new 2021 model-year vehicle in April was $38,585, according to J.D. Power. In January 2022—nine months later—that same model-year vehicle was selling for an average of $48,765 as a slightly used vehicle.

The trend also holds when a broader cross-section of model years is taken into account, including those bought before last spring. Before the pandemic, the first-year drop in value was about 33.3%, and then the car would continue to depreciate, at an average rate of 14% in each year after that, according to research firm J.D. Power.

But over the past two years, the trend line has deviated from the historic norm. In 2021, the initial depreciation hit had shrunk to 14.5% in the first year of ownership and two-to-five-year-old models were actually increasing in value, at an average appreciation rate of 12.9%, the firm’s data shows.

The auto industry is trying to catch up on lost vehicle production, following the twin blows of widespread factory shutdowns early on in the pandemic and then a computer-chip shortage that has idled car plants at times over the past year.

The availability of vehicles has plummeted during that time, hitting a low point last year as consumer demand was bouncing back. The supply of used cars also has been hit by fewer vehicles returning to the market off lease and rental-car companies holding on to their vehicles longer, unable to get replacements, auto executives and industry analysts say.

Ford Motor Co. Chief Executive Jim Farley said he has never seen a used-car market like the current one.

“Maybe for a month or two during a crisis, nothing that’s lasted this long,” he said.

Auto executives say vehicle production is expected to improve this year, and the surge in used-car prices is starting to level off as more buyers find themselves priced out of the market. At some point, the vehicle will return to being a naturally depreciating asset, said Tyson Jominy, analyst for J.D. Power.

“You can sometimes jump high and leave gravity for a few minutes, but overall we’re going to find that these things will start to depreciate again in the future,” Mr. Jominy said.

When exactly that will happen remains unknown and will likely depend on supply-side constraints easing and dealers replenishing their inventory of new cars and trucks, analysts say.

Meanwhile, some buyers are getting more for their trade-ins, allowing them to buy more expensive vehicles than they would have otherwise purchased, dealers say. About 12% of car shoppers who traded in 2021 model-year vehicles last year with 500 to 1,500 miles were able to get a higher amount than the original purchase price, according to car-shopping website Edmunds. That percentage was 3% in 2019.

Bruce Steinhardt, an 89-year-old Florida resident, said he was surprised to find that the Hyundai Sonata he leased three years ago was worth more than the roughly $15,000 buyout price negotiated as part of his lease. He said he decided to buy out the lease and then sell the car to the website CarGurus for $23,600. The deal netted him about $8,100, helping him recoup nearly all three years of lease payments, he said.

“It is literally crazy,” Mr. Steinhardt said.

Still, for many buyers on a tight budget, the higher used-car prices are becoming increasingly difficult to navigate and buying at the top of the market carries risk, analysts and dealers say.

Emerald Williams, whose Mercury Montego broke down in January, said she was struck by the gutted dealership lots and how expensive cars had become, even those with higher mileage. She said she ended up finding a used car but on the upper end of her price range and only after staying up to 2 a.m. looking at websites and out-of-state dealers.

“We were so stressed,” said Ms. Williams, 30 years old, who lives in South Carolina. “I knew I couldn’t afford a new car. But the used cars were close to the prices of the new cars.”