June 27, 2022

Why Used Cars Are Selling at Higher Prices Right Now Than New Cars

Why would people pay more for a used vehicle than new one? The answer appears to stem from availability.

The last time I purchased a used car it didn’t turn out well. A number of years ago, I bought a used 2005 Mazda Tribute for what I thought was a screaming deal: $5,900. The mileage was low, and the vehicle was in pretty meticulous shape—or so I thought.

Unfortunately, the engine had a small oil leak that turned into a large leak, and resulted in a blown engine. Six months after I bought it, the car was shot. I was out $5900, and was forced to downgrade to a Saturn as my commuter car.

For me, the experience was a lesson learned. Don’t invest too much money in used cars, especially of the older variety. A new report, however, suggests Americans are turning to used vehicles in droves—likely out of necessity.

Al Root, a senior writer at Barron’s, notes that surveys show many users are paying more for used cars than newer versions of the same model. Needless to say, Root says, this isn’t how things typically work.

“New cars are supposed to cost more than their used counterparts,” he writes. “But online car insurance marketplace Get Jerry found in a recent survey that four of the top 10 bestselling cars in the U.S. cost more to buy used than new.”

What Gives?

Why would anyone pay more for an old vehicle than new one? The answer appears to stem from availability.

As many will tell you, at some dealerships there are simply no new cars to be had.

“Over New Year’s, I purchased a car,” Hannah Frankman explained in a recent FEE article. “At the dealership I bought from, there wasn’t a single new car on the lot. Read that again: not a single new car.”

As Frankman notes, the supply of new vehicles has been severely disrupted by a global shortage of semiconductor chips and other supply chain issues. As a result, Ford’s 2021 production numbers came up short by 1.25 million vehicles. Toyota, meanwhile, was short 1.1 million. Other automobile manufacturers have experienced similar problems.

The vehicle shortage has caused serious delays for consumers.

Root, writing at Barron’s, says new cars now typically take “up to 10 months to deliver.” That might sound fast if you compare it to, say, the Trambant, the worst car in history, which had an average waiting period of 10 years. But this is not East Germany; Ameicans aren’t accustomed to waiting months for their vehicles.

As it happens, people who want a car right away have an alternative.

“Used cars can be purchased right now—if car buyers are willing to pay a premium,” Root explains.

This is why many used vehicles are selling at higher prices than new vehicles of the same model—and why used car prices generally are up 60 percent from pre-pandemic levels. 

Subjective Value and the Cost of Waiting

Basic economics teaches a fundamental reality of the human condition: scarcity. Resources are finite; there are never enough goods and services to meet human needs and wants.

Printing trillions of dollars during the pandemic, as the Federal Reserve did, did not solve the problem of scarcity. In fact, government actions taken during the pandemic undoubtedly made the problem of scarcity worse. By disrupting production and eroding the value of the dollar, US consumers are experiencing the highest inflation in decades and shortages of many goods—not just cars and computer chips, but everything from potatoes, eggs, and avocados to garage doors, bicycles, baby formula, and more.

This is why in February 2020 a fully loaded, brand new Tesla Model S Performance was $112,000 (if you want to pay that $7,000 full self-driving fee), while today the price tag on a pre-owned Tesla 2021 Model is $132k. Now, it’s true one can pay less buying a brand new car through Tesla, but the estimated arrival is as late as October.

Does it make sense to fork over thousands of more dollars to purchase a used vehicle today rather than wait to get a brand new one at a lower price? For many people, the answer is yes—otherwise they would not be making the purchase. Value is subjective, economics teaches For some people, the cost of waiting six months for a vehicle is simply too high. (For others, waiting six months to get a brand new car at a lower price is the preferred option.)

All of this explains why used cars are in such high demand right now.

I just hope that for people buying used cars, their experience turns out better than mine was when I purchased a lemon.

This article, Why Used Cars Are Selling at Higher Prices Right Now Than New Cars, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.