A cooling used car market is a good thing

Earlier this week the New York Times published this article with the headline “After Running Hot, Market for Used Cars is Cooling?” Yet, I wonder if the market for used cars is really cooling off? It depends on what your definition is of a “hot market.”

Used Car Lot Image

When most people think of a “hot market” they think of high prices and lots of sales. So when most people think of a cooling market, they think of lower prices and fewer sales, but as it turns out, that’s not what’s happening.

If you’re unlikely to read this entire post, here’s what you need to know – there are more used cars for sale and prices are dropping.

The NYT writes that prices are likely to come down, but what about the number of vehicles being sold? To understand the dynamics that brought about the “hot” market, we need to take look to the recent recession. During the recession a few things happened that caused used car prices to surge:

1. Consumers cut back on purchases so the manufacturers did the same. Since the manufacturers were making fewer new cars, the number of low mileage, late model used cars dried up. For example a used Honda Accord from 2010 with less than 30,000 miles is hard to find. Simply put, there were fewer high quality used cars out there.

2. During the recession, people who still had their jobs needed to get to work. Their cars continued to age, but since the country was in a recession, most of these folks couldn’t afford a brand new car so they opted for used models instead. Everyone was competing over a few high quality used cars or they had to buy an older car – driving prices for all used cars way up.

3. In 2013, the economy is healthier and interest rates are still low meaning many people are looking to trade-in their used car for a new one. The people that did buy or lease a new car in the past two or three years are looking to move out of their current ride. More trade-ins and more cars coming off lease means that the supply of used cars is increasing.

Using basic economics, we know that when the supply of something increases, prices drop.

Used Car Economics GraphWe had original market equilibrium at the point where the supply meets demand. In my graph, equilibrium was previously at the point where S1 and D1 meet. As supply increases due to trade-ins and cars coming off lease, the supply curve shifts to the right. In order to achieve equilibrium based on the higher supply, prices have to drop and quantity increases. An increase in quantity means more used cars will get sold!

Since more used cars are getting sold, declaring a “cooling” off in the used market is a bit misleading. Yes, prices are falling but that is only part of the story, more people are going to be buying used cars. This makes sense since the economy is recovering. As the economy recovers even more people will be looking to buy and this increase in supply means that people looking to buy a used car will be able to find one that suits their needs.

This is good news for consumers and dealerships alike. Consumers will finally be able to find and buy those used Camrys and used Civics at lower prices while dealerships will sell more cars each month. Maybe the dealerships won’t be making as much profit per vehicle but the increase in sales volume will certainly be welcomed.

A “cooler” market looks like it is going to be better for everyone.

Written by Turner Parlin, Director of Business Development at Mojo Motors
Photo source: Cup of Joe