The Used Car Market Is Still On Fire
A growing demand for cars and a lack of supply is making used autos more valuable than new ones, auto industry leaders say. Buerkle Honda on Facebook

The Used Car Market Is Still On Fire

Recent microchip shortages are delaying production of new cars and pushing consumers to the used car industry.

Cornerstone Auto VP Rob Powell says the past year has been tumultuous for car dealers across the nation. The auto industry has seen a seismic shift as ongoing supply chain issues have prevented important products like microchips from reaching car manufacturers. Now, a growing demand for cars and a lack of supply is making used cars more valuable than new ones, auto industry leaders say.

“A lightly used, one-year-old car with decent mileage can be sold wholesale in an auction for more than the price of the same make and model new on the lot,” Powell says.

Data from used car data website Carfax shows a 35 percent price bump for used autos in Minnesota between January 2020 to January 2021. Minnesotans walking into a used car dealership can expect to pay about $18,000 for a sedan, $28,000 for an SUV, and $38,000 for a pickup, according to Carfax.

What’s behind the price jump? Supply chain issues are the biggest culprit. A recent microchip shortage has made it difficult to complete production of new cars in factories. That means millions of new cars aren’t being built. According to the National Automobile Dealers Association, as many as 11.3 million vehicles won’t be produced in the second quarter this year due to the chip shortage.

Facing a shortage of new autos, people are turning to the used car market. Travis Moreno, a salesperson for Buerkle Honda, says now is a good time for Minnesotans to trade in. With the value of used cars on the rise, car owners are more likely to profit from trading in.

“I bought my truck back in 2019 for $21,000 and it’s worth $24,000 right now,” Moreno says. “The current market has been insane. It’s very easy to sell cars right now.”

Trends suggest both consumers and dealers alike may benefit from recent shifts in the market, for now. With used car prices soaring, dealers are willing to shell out a little more, with those same cars becoming more valuable the longer dealerships hold them on their lots.

“So far it’s been a financial bonus for us,” says Cornerstone’s Powell. “Used cars have gone up in value, which is completely paradoxical. All the cars on our lot become more valuable as we hold them in inventory, which is extremely rare. Depreciable assets should be going down every month.”

Though used car dealerships may reap the short-term rewards of this latest trend, there are long-term concerns. The market dictates the price of used cars. Used cars are more valuable now, but when the boom eventually plateaus, dealerships question how fast prices will fall.

If prices fall as fast as they went up, used car companies could see profit margins next to nothing. The values of the cars will go down with the pressure of the market. While this may mean the supply for new cars is increasing, dealerships predominantly selling used cars may feel tremors.

Still, some dealerships say the recent trend is peculiar, but not concerning. Initial reactions might be that the used car market can’t supply enough cars to satiate the growing demand. Powell, meanwhile, asserts that there are complexities that dictate consumer choices: personal preference, the value of trade-ins, and the depreciation of cars themselves.

“In the meantime, cars break down and reach end-of-life, which necessitates the purchase of something new,” he says. “In other instances, consumers understand the value of their trade-in has increased just as much as retail values. They are able to make a relatively similar value transaction as they could before the market value spike. It’s really a delicate balance that’s out of whack because production is so constrained.”

Another alternative to the used car market is simply delaying a decision to purchase a car. Even when new cars begin rolling off the assembly lines, there still may not be enough supply to satisfy pent-up demand, which means the car market could see yet another dip in supply.

“It’s been a pretty wild ride,” Powell said. “Ultimately, I feel demand is fairly consistent and will remain that way for the next few years.”