Why are used cars priced like new cars?

0:01NPR.

0:06This is The Indicator from Planet Money. I'm Ricky Mulvey. Joining me today is our producer, Angel Carreras. Mulvey, hello. How are you? Doing well. How are you? I'm a little winded. I just walked here to the office from my home. Congratulations. 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. 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.

0:46Like, 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. You know this isn't normal. This is extremely abnormal. 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. Ricky, I was playing my bugle. It was a solemn tone. Because the affordable used car market, as we know it, is dying. 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.

1:31This show won't last long. We've got sedans, we've got SUVs, we've got electric vehicles. And we've got deals, deals, deals so hot, I can't believe we're allowed to mention them. That's after the break.

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2:30Dell.com slash Dell-Pro. Built for you. This message comes from Amazon Business. You can't rely on guesswork to run your business. With smart business buying, innovative AI tools optimize your purchasing experience paired with delivery options. Empower your team today. More at amazonbusiness.com. 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. Whoa, whoa, whoa, Ricky, Ricky, take a chill pill, man.

3:07This all sounds kind of personal. 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. And you probably know that new car prices jumped during the pandemic and stayed elevated. 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%. 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. But this is just one part of the market.

3:43The used car market is the bad news. Jeremy Robb is the chief economist at Cox Automotive. It's a big automotive services and tech provider, and it owns Kelly Blue Book and AutoTrader. We asked him why used cars are so expensive, and first, he validated our feelings. A lot of people really wonder that and get frustrated, you know, and some people angry sometimes with it. 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. And today, the average used car that's just three years old goes for more than$32 ,000.

4:22So 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. It means that when the new car price adjusts down or adjusts up, the used car price of that same make model will move along with that. 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.

5:00Still, there's a supply shortage. Lower car production from 2020 means that used car shoppers have fewer choices years later, like in 2026. I call it like watching the snake eat the mouse or whatever. You kind of see it through time. It's a choke point, right, where there's lower supply. If there's lower supply, there's generally higher prices. So the car market snake is slowly digesting the used car mouse. And that is still taking a toll on the stomach. And now we have our third reason why used cars are so expensive, a business decision. Many automakers just stop making affordable new cars, the sedans that just got you around town.

5:42Ivan Drury is the director of insights at Edmunds. It's a car shopping and research website. But something in which they said, well, sedans, nobody wants them. Big SUVs, let's make more of those. What do big SUVs cost? 60, 70, 80, 100 grand. Entry level sedans, 20, 30K, completely removed from the market. Ivan is talking about American car makers. Ford, for example, just straight up stopped making regular sedans like the Ford Fiesta. That was just a few years ago. You have the Japanese and the Koreans, very few German offerings. The Americans virtually got rid of everything. So you remove an entire vehicle category type and therefore you consolidate this to a few offerings.

6:24Ivan is talking about Honda Civics, Hyundai Elantras, those kinds of cars. There's nothing bad in that segment. But at the same time, it makes it very difficult for people to say, look, I want just like A to B transportation. I do not need something fancy. And this consolidation means you're fighting to get on a wait list for some of these cars. Like from what I've seen, there's a super low supply of new Honda Civic hybrids in Denver where I live. The big old Honda SUVs are sitting on a lot. And beneath these headline numbers and general conditions, an entire part of the used car market has basically been totaled.

6:59The affordable used cars, the ability to buy a decent ride for 10 to 15 grand. This is a sector that Ivan looked into. Back in 2019, the average vehicle in that price range was about five years old. Today,$10 ,000 to$15 ,000 gets you a car that's closer to nine years old, and it has about 100 ,000 miles on it. And this phenomenon creates a personal finance problem. Trying to stay within a budget can create even more costs. Cars with 100 ,000 miles on them usually need a little more love than the new ones. And if you're not a gearhead, you may need to pay someone else to replace water pumps and timing belts, It's the expensive, annoying things that break on high-mileage cars.

7:38Ricky, I have very soft hands. Could you locate those things in a car? I don't think I could find a timing belt. This is why I work in podcasting. Anyway, so we've talked about the reasons why a used car's sticker price is more expensive. But there's another big cost to factor in. Interest rates. In 2019, a borrower with good, not great credit could get a car loan with a 4.5 % interest rate. Today, that same loan for the same borrower is closer to 9%. That's about double. This is important because the record keepers for inflation data aren't keeping track of the monthly interest payments, just the cost of the car.

8:12It's one of those things where you have to do the math nowadays because borrowing is so expensive that that new versus used proposition, if you can get a nice low APR on a new car, really could wipe out the proposition of even looking at a used car. Ivan is saying this because used car loans generally have higher interest rates than new cars. Banksy used car loans as riskier. But a car market is not a monolith. And there's one sector where Ivan says used car buyers can find some deals, deals, deals. You look at those resale values and on EVs, it is just, it's kind of atrocious. Ivan says that this comes from some misconceptions about electric vehicles, like how long EV batteries last, EV reliability.

8:54He thinks that this misunderstanding can lead to some better deals for electric vehicles, and he's bullish on this market. Is the technology getting better? Oh, yeah, you better believe it, right? It's that J curve of growth and technology that also makes it seem, if I buy this today, is it outdated tomorrow? And for some vehicles, yes, technically yours can be outdated tomorrow. Is it still going to function? 100%. So the sticker price of used cars are so expensive for a few reasons. First, new cars are more expensive. That's the price waterfall. Second, the pandemic supply chain is still playing a role.

9:28And third, many car makers just stopped making affordable sedans. And this sticker price doesn't tell the whole story. Many car buyers are still dealing with insurance, gas or electricity, and the cost of taking out a loan. But Angel, I heard you're in the market for a used car, for a car in general. I found an electric vehicle that's$30 ,000 off MSRP. There's just a small catch. Yeah, that sounds like, I mean, given this entire episode, that sounds like a deal. What is it? It's a lime green cyber truck that says Cyber Beast spray painted on the side. It's$88 ,000. I bet you can get a little bit of a better deal if you want it, though.

10:03I don't know if lime green's my color. And furthermore, I don't know if I'm a cyber beast. Okay, that's fair enough. Still, this car is the shortest car story ever told. For sale. Lime green cyber truck. Gently used. This episode was produced by Corey Bridges with Engineering from Sina Lafredo. It was fact-checked by Sierra Juarez. Kate McCannon edits the show, and The Indicator is a production of NPR. This message comes from Mint Mobile. If you're tired of spending hundreds on big wireless bills, bogus fees, and free perks, Mint Mobile is for you. Shop plans at mintmobile.com slash switch. Taxes and fees extra.

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