Why are used cars so expensive and when will cost go down?

Used car shoppers have encountered sticker shock due to surging costs of the vehicles — and there is fear the spike in prices will continue.

Those shoppers, some of whom waver to the rising costs out of necessity, are not seeing red. The average price of a used car in November, according to automobile dealer Edmunds.com, was $29,011. It’s a sharp increase of 21.4% from the same time in 2020, when the average cost was $22,679.

More than 2 million used-car buyers are purchasing “vastly overpriced used vehicles,” monthly, KPMG said in a December report.

Here’s a look at the rising costs of used vehicles, which experts say is being driven by the new automobile market.

‘Record highs’

The average price of a used car rose in every month from February to November of 2021, Edmunds data shows. Figures from December were not available.

The surge began years ago but compounded in 2020. In January 2016, the average cost was $18,661 for a used car — and the prices have steadily increased before a sharp spike last year.

“Used prices are blowing past record highs on a regular basis as the new car shortage diverts buyers into the only other option, the used market,” Ivan Drury, Edmunds’ senior manager of insights, said in a statement to McClatchy News.

It’s not just Edmunds, as Kelley Blue Book has also noted the high prices. Kelley Blue Book said last month its average used car listing price in November was $27,569, an increase of 27% from a year prior.

KPMG called the surge “unprecedented,” with its decades of data showing “nothing like 2021.”

“I’ve never seen anything remotely close to this — it’s craziness,” longtime Nebraska auto dealer Jeff Schrier told The Associated Press. “It’s quite frustrating for so many people right now.”

Chip shortage affecting surge

A worldwide shortage of microchips for new vehicles has pushed prices up for new cars, which in turn has affected the market for used cars.

“Chip suppliers shut down their own factories early in the COVID-19 pandemic to protect the health of their workers,” Kelley Blue Book said. “Once they were able to resume production, an economic slowdown triggered by the pandemic led automakers to trim their orders.”

Chip factories became overwhelmed with demand when shoppers “went on an electronics buying spree” when the economy began to recover, according to Kelley Blue Book.

Factories eventually shut down when they were unable to finish building automobiles, according to the AP. The shortage meant a shortfall of an estimated 8 million vehicles in 2021, Consumer Reports said.

Like used cars, the average cost of new automobiles has also surged. Edmunds says the average price of a new car in November was $45,209 — up nearly $5,000 from the beginning of 2020.

“It’s the same thing that’s going on with cottage cheese and houses and everything right now. I mean, it’s inflation and we’ve seen it in the car market,” Jay Leonard, the owner of Preferred Automotive Group, told WANE. “When you’ve got new cars that are not being built, and the only thing out there are used cars, the price is going to go up.”

What else is causing spike in prices?

A shortage of workers has also led to fewer new vehicles being made. Kelly Blue Book said car manufacturers had more than 584,000 jobs in October they were unable to fill.

Fewer new vehicles on lots also means fewer people are selling off their old vehicles. This led to a shortage of used cars, driving the price up.

“There are also used car supply constraints stemming from fewer trade-ins on new car sales, lease returns not coming back at their standard rate and rental car agencies not able to release used inventory due to a lack of new replacement cars,” Ivan Drury with Edmunds told McClatchy.

Some dealers that often had hundreds of used cars on their lots now have fewer than 10, according to KPMG.

“Ford and GM both report steep declines in lease-return rates,” KPMG said. “In 2020, more than three-quarters of their lease cars were returned. By mid-2021, that figure had fallen to 10% for GM and 34% for Ford.

When will prices stop rising? Or will they?

Experts are mostly grim on their 2022 outlook for the used car market. It’s partially because the chip shortage continues to be an issue within the automobile industry.

“That will take another one to two years before the industry can catch up with the demand,” Patrick Gelsinger, CEO of Intel, told investors in July, according to The Register.

Kazunori Ito, head of equity research for the financial services giant Morningstar, eyes 2023 as when a shift could occur. He said in August ”the current crunch is stemming from suppliers’ lack of output and (automakers) trying to buy more components than what they need,” according to Market Watch.

Pinpointing when the surge will stop may also depend on inflation, says KPMG.

“If prices continue to rise, it could create a new floor for new and used-car prices,” KPMG said. “Raising interest rates to curb inflation could also reduce consumer demand, placing downward pressure on pricing and bringing back aggressive incentive spending. The other factor is how quickly the industry solves the supply-chain issues and ramps up production.”

Elevated used car values can be expected throughout the year, Drury with Edmunds said. Leonard, the owner of Preferred Automotive Group in Indiana, is hopeful “this will all be in the past” by the beginning of 2023, he told WANE.

Which vehicles are being affected the most and least?

An analysis by iSeeCars.com says prices for the Nissan LEAF, Misubishi Mirage, Chevrolet Spark and Kia Forte grew the most from November 2020 to November 2021.

The LEAF, according to the analysis, rose from an average cost of $8,404 to $21,524.

“While used car prices for all electric vehicles have increased in recent months, the dramatic increase for used Nissan LEAF prices could be attributed to the 2018 model, which featured a significant bump in EV range, performance improvements, and an exterior facelift, and which only just entered the market this year in substantial numbers,” said Karl Brauer, iSeeCars’ executive analyst.

The website said the Volvo XC90, Nissan Titan XD, Porsche Macan and INFINITI QX80 saw the smallest price increases from August 2020 to August 2021. The list is dominated by luxury SUVs, including the XC90 that has grown in price by just 9.3%.

In the market for a used car? Here are some tips

A used car, if you can afford one, is one of the best investments you can make, market researcher Jim Bianco told CNBC last month.

“If you want to know what the best investment you probably had in 2021, it’s that car sitting in your driveway or in that garage,” Bianco said. “It is appreciating faster than the stock market and lately faster than some cryptocurrencies.”

He encourages people who are buying used cars to flip them to do it now, “because it’s only going to get more expensive.”

If you need a used vehicle, Kelley Blue Book encourages shoppers to expand their search, stay patient, understand the timing and don’t jump at the first offer.

“It may (make) sense to keep your existing car for another year if you can,” Kelley Blue Book said. “If you must buy, be prepared to take excellent care of your next car to keep it running for a long time.”

David Parris, a senior manager at J.D. Power, said now may be a good time to buy a new car, according to the AP. While prices for new cars are also rising, they are doing so at less-steep levels.

“If you look hard enough and are willing to wait and travel, you can find deals across most brands,” Paris told the AP.