The Impact of High Vehicle Prices on Trade-In Values

Introduction

During the peak of the pandemic, dealers were offering more for used cars than their original purchase prices, and buyers were willing to pay over MSRP for new vehicles. However, as the market stabilizes, some Americans are facing negative equity issues at trade-in time.

Rising Negative Equity

Edmunds reports that drivers who purchased cars at high prices with loans are now experiencing negative equity. Those who paid above MSRP during the pandemic are especially vulnerable, as their trade-in vehicles have depreciated significantly.

Depreciation Trends

Recent data shows a decline in average transaction prices (ATP) for used vehicles across different age categories:

• 1-year-old vehicles: $38,720 (down by $6,763)
• 2-year-old vehicles: $32,583 (down by $3,294)
• 10-year-old vehicles: $12,447 (down by $1,304)

Market Insights

One- and two-year-old vehicles are experiencing the most significant depreciation, with the average transaction price dropping by over $6,000 for one-year-old cars. The overall ATP for used vehicles decreased to $28,371 in Q4 2023, a 4.4% drop from the previous year.

Opportunities in the Used Car Market

While negative equity poses challenges for some buyers, it also means there are great deals available on used cars. Large luxury cars and mainstream SUVs are among the segments offering the biggest discounts on used vehicles.

Conclusion

As the market adjusts to changing conditions, consumers need to be cautious when trading in newer vehicles to avoid negative equity. While there are opportunities to save on used cars, especially for buyers not trading in relatively new vehicles, finding discounts may be challenging due to limited supply of older used cars.