Why Falling Used Car Prices Aren't the Bargain You'd Expect

In recent times, the used car market has witnessed a notable decrease in prices, presenting a double-edged sword for vehicle owners and potential buyers. Data from Edmunds' Q4 Used Vehicle Report highlights a trend that could have adverse effects for some consumers, particularly those looking to trade in their vehicles.

Downward Trend in Used Car Values

The average transaction price (ATP) for used vehicles has seen a significant drop, settling at $28,371 in the fourth quarter of 2023. This represents a 4.4 percent decrease from the previous year, indicating a stabilization in the used car market. However, this stabilization comes with its own set of challenges, especially for individuals looking to trade in their vehicles.

The Rise in Negative Equity

One of the more concerning trends is the increase in trade-ins with negative equity. In the last quarter of 2023, 20.4 percent of new vehicle sales involving a trade-in reported negative equity, marking the highest percentage in two years. This trend underscores the growing number of consumers who find themselves owing more on their auto loans than the current value of their vehicles.

Record Highs in Upside-down Loans

The financial burden on those with upside-down loans has reached new heights, with the average amount owed hitting a record $6,064 in Q4 2023. This upward trajectory in debt underscores the financial implications for consumers, especially those who purchased new vehicles during the pandemic at prices above the Manufacturer's Suggested Retail Price (MSRP).

Impact on Near-New Vehicles

Vehicles that are 1 to 2 years old are experiencing the most significant drops in value, making them particularly vulnerable to depreciation. The decrease in ATP for these newer models is stark, with 1-year-old vehicles seeing a reduction of over $6,000. This shift marks a departure from recent years when trade-ins were somewhat protected from negative equity due to high demand for used inventory.

Opportunities Amid Challenges

Despite these challenges, there remains a silver lining for those with the means to purchase used vehicles, especially in the luxury segment. The analysis of 0- to 3-year-old vehicles reveals substantial savings when compared to new models, with luxury large cars and large mainstream SUVs offering significant discounts.

A Cautious Outlook

The forecast for used vehicle prices remains uncertain, influenced by factors such as the length of time vehicles remain unsold and the variability of automaker incentive programs. These factors are likely to affect trade-in values, making it increasingly difficult for dealers and consumers to predict future trends.

This article was co-written using AI and was then heavily edited and optimized by our editorial team.