Why Used Car Prices Are High — Millions Of Cars Are Missing

Key Concepts

• Supply Shock: The disruption in vehicle production during the pandemic that led to a permanent reduction in the total number of cars in the US market.
• The Waterfall Effect: An economic phenomenon where new car pricing and incentives dictate the pricing of the entire used car market.
• Car Park: The total number of vehicles currently in operation on US roads.
• OEM (Original Equipment Manufacturer): The automakers themselves (e.g., Ford, Toyota, GM).
• Incentives: Manufacturer-provided discounts or rebates used to lower the effective price of new vehicles.
• Leasing Pipeline: The cycle of vehicles returning to the market after a lease term, which serves as a primary source for used car inventory.

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1. The Shift in Industry Strategy

The US automotive industry has transitioned from a "volume-based" model to a "margin-based" model. Historically, the industry chased record-breaking sales numbers (peaking at 17.5 million units in 2016). Today, automakers prioritize profitability over volume, selling fewer cars at higher price points.

• Data Point: Forecasters expect 16 million sales in 2026, nearly 10% lower than the 2016 peak.
• Cumulative Loss: Since 2016, the industry has "lost" approximately 16 million potential sales, creating a permanent supply deficit.

2. The Pandemic’s Lasting Impact

The pandemic acted as a catalyst for this shift. Supply chain disruptions forced manufacturers to stop overproducing. During this period, automakers realized they could achieve record profits by focusing on high-trim, high-margin vehicles (SUVs with luxury features) rather than entry-level models.

• The "New Normal": Automakers and dealers have expressed a desire to maintain this disciplined production approach to avoid the "push" strategy of the past, where excess inventory forced heavy discounting.

3. The Used Market Squeeze

The reduction in new car sales has created a ripple effect that severely impacts the used car market.

• Leasing Decline: Before the pandemic, leases accounted for 33% of new car sales; this dropped to 18% in 2022 and has only recovered to 24%. This significantly shrinks the pipeline of high-quality used vehicles entering the market.
• Inventory Forecast: The number of vehicles flowing into the wholesale used market is projected to remain below pre-pandemic levels through 2030.
• The Waterfall Effect: Because new car incentives are low, new car prices remain high. Consequently, used car prices are forced upward because they must remain lower than the price of a new equivalent, but the "floor" for those prices has risen significantly.

4. Affordability and Consumer Impact

The market has effectively pivoted toward wealthier consumers.

• Income Gap: The average household income for a new car buyer is $150,000—nearly double the national average.
• Cost Burden: Monthly payments have increased by $150–$200 for vehicles similar to those consumers are trading in. Prices have risen by roughly 33%, while wage growth has failed to keep pace.
• Trading Down: Consumers are increasingly forced into the used market, even for older vehicles (9–10 years old), which now command higher-than-normal wholesale prices due to high demand.

5. Barriers to Market Correction

Several factors prevent a return to high-volume, low-cost production:

• Production Capacity: Some manufacturers, such as Toyota, are already operating near full capacity.
• Discipline vs. Market Share: Automakers are wary of returning to "market share wars," which historically led to overproduction and profit-eroding incentives.
• Trade Policy: Tariffs on vehicles imported from South Korea and Mexico, combined with efforts to block Chinese competition, limit the availability of lower-cost, entry-level vehicles.

Synthesis and Conclusion

The US auto market has undergone a structural transformation. By prioritizing high-margin vehicles and maintaining disciplined production levels, automakers have successfully insulated themselves from the volatility of high-volume sales. However, this "healthier" industry model for manufacturers has created a long-term supply deficit for consumers. With the leasing pipeline diminished, incentives at historic lows, and production capacity constrained, the market is unlikely to return to pre-pandemic affordability levels in the near future. The "waterfall effect" ensures that high new-car prices will continue to keep used-car prices elevated, effectively pricing out a significant portion of the American population from the new vehicle market.