Why are used cars priced like new cars?

Angel Carreras (0:01)

NPR.

Ricky Mulvey (0:06)

This is The Indicator from Planet Money. I'm Ricky Mulvey. Joining me today is our producer, Angel Carreras.

Angel Carreras (0:11)

Mulvey, hello, how are you?

Ricky Mulvey (0:12)

Doing well. How are you?

Angel Carreras (0:14)

I'm a little winded. I just walked here to the office from my home.

Ricky Mulvey (0:18)

Congratulations.

Angel Carreras (0:19)

And Ricky, what I'm saying is, I need a car, but buying an affordable car is really difficult these days. I mean, the average new car sells for over, get this, are you ready? $50,000 in the United States.

Ricky Mulvey (0:32)

But today, we want to talk about the used car market. We've noticed some economic weirdness, like a used Toyota truck with over 200,000 miles on it, going for 20 grand or a decades old Honda sedan selling for its original retail price. Like, what is going on? How did used cars get to be so expensive? Why isn't depreciation depreciating? Car market researcher Ivan Drury sees the madness.

Ivan Drury (0:56)

You know this isn't normal. This is extremely abnormal.

Ricky Mulvey (0:59)

Over the past few years, the cost of a new car has risen at a rate that's close to headline inflation numbers. But something is happening under the surface.

Angel Carreras (1:11)

Ricky, I was playing my bugle. It was a solemn tone because the affordable used car market, as we know it, is dying.

Ricky Mulvey (1:20)

Today on the show, we'll tell you the three reasons why affordable used cars are so difficult to find. Plus, one area where car buyers can find discounts if you want to be a rational economic actor.

Angel Carreras (1:31)

This show won't last long. We've got sedans, we've got SUVs, we've got electric vehicles.

Ricky Mulvey (1:35)

And we've got deals, deals, deals so hot, I can't believe we're allowed to mention them. That's after the break.

For many Americans, transportation is their second largest expense right after housing. And buying a car is stressful. A war of attrition, where you end up in a dealership for hours, test driving, negotiating, waiting a half hour for a salesperson to print out a few pieces of paper.

Angel Carreras (1:59)

Whoa, whoa, whoa, Ricky, Ricky, take a chill pill, man. This, this all sounds kind of personal.

Ricky Mulvey (2:03)

It's a little personal. Cars, they're a high dollar item, one you don't buy that often. So inflation hits a little different. You only notice the total price increase spread across several years.

Angel Carreras (2:15)

And you probably know that new car prices jumped during the pandemic and stayed elevated.

Ricky Mulvey (2:20)

But here's the good news. That price increase, it's smoothing out. From 2019 to now, the price of a new car has risen at an annual rate of 4.3%.

Angel Carreras (2:29)

The whole CPI index went up annually a little less than 4% in the same time period. The yearly difference isn't totally out of line.

Ricky Mulvey (2:36)

But this is just one part of the market. The used car market is the bad news.

Angel Carreras (2:41)

Jeremy Robb is the chief economist at Cox Automotive. It's a big automotive services and tech provider, and it owns Kelley Blue Book and Auto Trader.

We asked him why used cars are so expensive, and first, he validated our feelings.

Jeremy Robb (2:54)

A lot of people really wonder that and get frustrated. You know, some people angry sometimes with it.

Ricky Mulvey (3:00)

See, used car prices from that same time period, 2019 to now, they've gone up about 5.5% annually, accelerating past that average inflation number and new car price growth.

Angel Carreras (3:11)

And today, the average used car that's just three years old goes for more than $32,000.

Ricky Mulvey (3:17)

So what's happening? The first reason used cars are so expensive is something called the price waterfall. Used car prices follow new car prices. This isn't a new phenomenon.

Jeremy Robb (3:28)

It means that when the new car price adjusts down or adjust up, the used car price of that same make model will move along with that.

Ricky Mulvey (3:38)

And one reason this price waterfall is still moving upwards is tariffs on new cars and the materials that make them. So even though many used cars were made before tariffs went into effect, their prices are still affected by them. The second reason that used cars are so expensive is the pandemic. Still, there's a supply shortage. Lower car production from 2020 means that used car shoppers have fewer choices years later, like in 2026

Jeremy Robb (4:04)

I call it like watching the snake eat the mouse or whatever. You kind of see it through time.