Used Car Prices Falling as Inventory Grows

Just the Facts:
  • Used car prices will drop — perhaps up to 2 percent — during 2014, according to Edmunds analysts.
  • More than a half-million additional used cars will flood into the market because of lease returns and an improving economy.
  • CPO programs, already popular, will be more attractive as used car prices drop.

SANTA MONICA, California — One sign of a recovering economy is that used car prices are falling.

In 2014, Edmunds analysts are expecting the average price of used cars to drop, perhaps up to 2 percent, as consumers deposit more than 500,000 additional used vehicles into the market.

For the past five years used-car prices have been high: Consumers held onto their vehicles during the recession. Now those people are ready for a change, so they are finally selling or trading in their stalwart, aging cars, Edmunds analysts say. A higher number of lease returns is also adding to the growing inventory of used cars.

While a drop of up to 2 percent may not sound like a big deal, it could have a ripple effect, "helping buying power to shift to the consumer," according to Joe Spina, Edmunds director of remarketing.

However, it's also possible that the drop in used-car values will push up the monthly payments of new leased cars. Softening "residual values" — what a car is worth at the end of the lease — cause lease payments to rise. If a car is worth less at the end of the lease, the monthly payments will be higher, experts explain.

"Franchise dealers will have access to about 550,000 additional used cars taken as trades and returned leased vehicles," says Spina. "Many of these vehicles will be wholesaled at auction and picked up by independent dealers."

Meanwhile, experts say car buyers should expect the following changes:

  • Lower values on their trade-in vehicles. When the inventory is high, the value of used cars drops. That's because dealers know trade-ins might sit on the lot for months. Price drops will likely be greater on luxury cars.
  • Attractive prices on good used cars. This will actually benefit the shoppers who believe that buying used cars saves money.
  • Even better certified pre-owned (CPO) car deals. Manufacturers have strengthened these popular CPO programs by offering lower-interest financing and included service plans. Now, with lower used car prices, the factors combine to make for an even more attractive package.
  • Greater selection of used cars for buyers to browse. Some new-car shoppers who don't have enough for the new car of their dreams could now find what they desire on the used car lot.
  • "Manufacturers might ratchet back their leasing because of a decline in used prices," Spina says. "But this is cyclical — they are always looking at when the cars are coming back."

    Car shoppers can keep up with changes in the car market by using the new- and used-car True Market Value (TMV®) tool.

    Edmunds says: Used car shoppers might have reason to celebrate, while new car shoppers could see a hit on their trade-in values.