Summary:
- Used car prices dropped 6.2% year-over-year in Q3 2023, with EVs experiencing sharper declines, including Tesla Model S and Model 3 prices falling by 56% and 48%, respectively.
- New car sales hit a five-year high in 2024 as supply chains recovered, reducing demand for used vehicles. Rising interest rates also tempered buying activity.
- Pre-owned EVs offer some of the best value in the current market, with some models like the Tesla Model 3 and Model S experiencing price drops of around 50%.
- Sellers face a tougher market, especially in oversupplied segments like compact cars, while trucks and hybrids retain strong resale value.
- Used car prices are expected to stabilize as depreciation rates normalize, though potential trade tariffs could disrupt pricing trends.
The used car market has been highly volatile over the past few years. Its unstable behavior has been primarily driven by pandemic-driven supply chain issues, a shortage of new vehicles, and increased demand for personal transportation. But with new car production growing year-over-year and new vehicle sales rising to pre-pandemic levels, the auto industry is finding its footing once again, and used car prices are finally cooling. This was particularly true for electric cars, where 2024 steep declines in used EVs like the Tesla Model 3 and Model S. But what do these market changes mean for the average buyers and sellers and what can we expect in 2025 and beyond?
Used Car Prices Are Falling, but Not Equally Across the Board
After setting records in both 2021 and 2022, used car prices started to slide in 2023, a trend that has carried into 2024. According to Edmunds vehicle prices declined 6.2% year over year, down to $27,177 from $28,960 in Q3 2023, with EVs seeing even steeper declines. A recent article from Consumer Reports suggests a large drop in electric vehicle prices. Though down 17 percent in the past year, the analysis indicates an exceptional 36% over the previous two years. And it is from these used markets of Tesla models that some of the unbeatable deals show up.
Prices for used Teslas have plunged 36% from a year ago, which is a 56% plunge in prices for used Model S vehicles to an average of $32,582. The used Model 3s have fallen 48% to an average selling price of $26,785. Such irregular depreciation means that buyers can find deals, particularly on smaller cars and sedans.
Why Are Prices Dropping Now?
The used car price declines can be traced back to several key factors. One of the biggest drivers is the recovery of new car sales. As chip shortages and other supply chain issues ease, new vehicle inventories are rebounding. According to Reuters, In 2024, US new car sales rose to a five-year high.
The new car market has rebounded as supply chain disruptions eased and automakers ramped up production. With new car inventory rising compared to previous years, more buyers are opting for new models, reducing demand for pre-owned vehicles. In November, Cox Automotive reported that new-vehicle inventory topped three million for the first time since the pandemic.
Additionally, rising interest rates have made auto loans more expensive, which has tempered demand for vehicles across the board. Experian, a leading provider of data analytics and credit reporting, reported that the average used car loan interest rate surpassed 12 percent in late June 2024. Higher financing costs are pushing buyers to reconsider large purchases or opt for cheaper vehicles, further softening pre-owned car prices.
Lastly, the market is still adjusting to the unusual conditions of the pandemic years. With an influx of off-lease vehicles and more trade-ins coming back to dealerships, the used car supply is finally catching up to demand.
What Does This Mean for Buyers?
For those in the market for a pre-owned car, the current environment is more favorable than it has been in years. According to Kelley Blue Book, In December, the average new car transaction price reached $49,740, just $218 below the all-time high recorded in December 2022. The combination of falling prices and increasing inventory means buyers have more options and negotiating power.
Used car prices remain significantly higher than historical averages, despite recent declines. While down from the 2022 peak of over $30,000, the average price of $25,328 in 2024 is still substantially higher than the 2019 average of $20,618. It would take a sustained period of price decreases to bring the market back to pre-2021 levels.
That said, buyers should still be strategic. While prices are declining overall, high-demand models like hybrids and EVs remain relatively expensive. If you’re considering one of these vehicles, it’s worth shopping around or waiting for further price adjustments. For those looking for value, compact cars and sedans are currently offering some of the best deals, with many models priced below pre-pandemic levels.
Another tip: pay close attention to financing options. With rising interest rates, buyers should aim to secure a lower rate by improving their credit score or shopping around for better loan terms. A slightly lower interest rate could save thousands of dollars over the life of the loan, offsetting some of the costs associated with higher borrowing rates.
What Does This Mean for Sellers?
Sellers will have an even tougher market, especially those seeking to offload vehicles in oversupplied segments. Subcompact and compact car owners must rethink their expectations because those vehicles have the steepest price declines. On the other hand, owners of trucks, SUVs, and hybrids still have a relatively strong position.
For private sellers, this may be interpreted as putting more into the marketing of their vehicles by making sure the price is competitive, the car is in excellent condition, and touting those features that set it apart. Dealerships are offering less for trade-ins as wholesale prices drop, so sellers may get better deals by selling privately.
Looking Ahead
The used car market is likely to remain dynamic in 2025 as new car production continues to recover and economic conditions evolve. Analysts believe the selling price will most likely stabilize in the coming months, and their rates of depreciation will also continue to fall closer to normal rates.
Still, a 25% tariff from Canada and Mexico proposed by the Trump administration could raise the price of a new car dramatically higher, on average, by $3,000 because North American auto manufacturing is so deeply integrated, with many parts crossing borders during production.
This could vastly increase demand for pre-owed vehicles and, with that, drive the prices up greatly. The scarcity of used cars is already at its worst; hence, this may be reflective of price jumps similar to the COVID-19 era.
