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How a perfect storm of shortages and rental car chaos sent used-car prices skyrocketing

Cars sit outside a used car dealership with spray paint on the windows advertising the vehicles.
Used car and truck dealers have bought models for more than their original sticker price.
  • Used-car prices have skyrocketed over the last year.
  • A supply crunch in new cars is spurring demand for used models.
  • Prices may not return to normal for at least a year, one expert told Insider.
  • See more stories on Insider's business page.

If you're looking to get a sweet deal on a used car to take advantage of the warm summer weather, it's not going to happen.

The market for secondhand cars is absurdly and unprecedentedly hot right now. Used vehicles went for a whopping 40% more in June than they did before the pandemic in February of 2020, according to data from JPMorgan.

The average nine-year-old car changed hands for $13,250 in June, according to automotive research site Edmunds. That's a 30% hike over the same month in 2020, while a five-year-old vehicle will run you a staggering $24,000 - up more than $6,000 from a year ago.

The insanity all comes down to simple economics: demand for used cars far outweighs their supply, pushing prices higher and higher. But the reasons for scant inventories and such high interest in used cars get a bit more complicated.

Why are used cars so expensive right now?

The market for used cars is deeply intertwined with the market for new ones, says Kayla Reynolds, an analyst at Cox Automotive. The latter is going through a rough patch, and those troubles are trickling down into the used market.

A devastating shortage of microchips - which are necessary for all manner of critical electrical components - is slowing car production worldwide, choking the supply of new models and driving their prices skyward. High dealer markups and a lack of options are forcing more buyers to shop secondhand, chipping away at used-car inventories, Reynolds said.

To put the magnitude of this shortage into perspective, new-car inventory in the US was down 54% in June as compared to the same month in 2019, according to Cox. Dealer incentives have plummeted and transaction prices for new cars have hit all-time highs as a result.

That's bringing a whole new set of customers to the used market, people who were prepared to spend serious money on a brand-new set of wheels and are, in turn, driving up used-car prices, says Ivan Drury, senior manager of insights at Edmunds.

Read more: Meet 9 former Tesla execs who left Elon Musk to become power players at rivals like Apple and Rivian

A drop in new cars rolling off assembly lines has upended the flow of vehicles to and from rental agencies, which are typically a major source of used inventory. Rental companies, which sold off cars en masse during the pandemic, usually buy some 2 million new cars every year and turn them over every 1-2 years, Drury said.

With travel surging back, they've resorted to snatching up used cars - and they're not giving them up.

Moreover, with new-car prices through the roof, people are holding onto their aging vehicles longer instead of trading them in, cutting off the flow of cars onto the used market. For the same reason, they're opting to buy their leased vehicles at the end of the term, rather than swap them in for a new lease.

When will the madness end?

There is good news. Prices seem to have peaked in May and are heading back to Earth.

Between May and June, wholesale car prices declined for the first time since December, suggesting that demand and supply are on a path toward some kind of equilibrium, Cox's Reynolds said.

She expects that retail prices will soon follow, and that shoppers will start to notice prices on car lots gradually dropping by the fall. The pandemic-induced car-buying frenzy tapering off partially explains the shift, she said.

But the supply crunch brought on by the chip shortage isn't going away anytime soon, meaning it could be quite a while before shoppers see used-car prices they're accustomed to. Even once new models are back in stock, the secondhand market won't snap back to normal overnight, Drury said.

His advice to car buyers: "I'd say give it at least six months. And in all honesty, if you can hold off for an entire year, you're better off with that."

Are you a car dealer, buyer, or private seller with a story to share about what it's like to buy and sell cars in this red-hot market? Contact this reporter at tlevin@insider.com

Read the original article on Business Insider

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