Why Are Car Trade-In Values Going Through the Roof?
The struggle of the auto industry’s current inventory shortage is real. Thanks to a perfect storm of plant shutdowns, an ongoing microchip shortage and relentless shopper demand, new-vehicle supply has been sinking fast. One silver lining is that the lucky (or prodigal) car shoppers who can find the vehicle they want may be in for a pleasant surprise when they trade in their current rides, as 53% of shoppers we recently surveyed said they plan to do. Used-car trade-in values are soaring, thanks to a domino effect caused by what’s shaping up to be another crazy year for the industry.
Related: How to Get the Best Offer for Your Trade-In
Vehicle Shortage: The Backstory
It doesn’t take an economics class to understand the principle of supply and demand. When demand is high (as it’s been for vehicles during the pandemic), and supply is low (due to numerous factors described below), prices rise. According to J.D. Power, decreased incentives tacked at least $1,200 to the price of a $40,000 vehicle bought now versus in the summer of 2020. As a result of the new-vehicle shortage, shoppers have turned to used cars, which set off another spiral of inventory turbulence.
The chain of events that led to the current inventory shortage began when automakers shut down vehicle manufacturing at the start of the pandemic. Almost every automaker, as well as many suppliers, halted production in March and April 2020. This caused a ripple effect in the entire supply chain that a subsequent microchip shortage only exacerbated, IHS Markit analyst Stephanie Brinley explained.
“Throughout 2020 and into 2021, there were manufacturing slowdowns related to parts supply and shipping,” Brinley said. “The most impactful and visible is a shortage of semiconductor chips, which are included in electronic control units that manage a variety of functions within a vehicle.”
Car companies compete with electronics manufacturers for microchips, and when demand for devices like laptops and video games skyrocketed during the pandemic, car manufacturers were left out in the cold. As a result of the shortage, the auto industry had to once again slow or halt production. The impact on vehicle production has been significant: IHS Markit estimates 1.43 million fewer light vehicles were produced globally in the first quarter of 2021 than previously forecast.
While the supply-chain disruptions play the largest role in the inventory shortage, increased shopper demand is also a contributing factor. According to Tyson Jominy, J.D. Power’s vice president of data and analytics, the industry is still seeing record sales even during the inventory shortage.
“Demand for vehicles remains so robust that in April total industry sales reached 18.8 million units” at an annualized rate, Jominy said. “The best year at any point during the recovery was 17.4 million total sold, and last month was selling at a rate 10-20% stronger than the best year in the recovery. That’s how strong consumer demand is; 75% of vehicles are spoken for before they even arrive at the dealership.”
No New Cars? Used It Is
The shortage of new vehicles has forced shoppers and dealers to shift to the used-vehicle market. When shoppers can’t find a new vehicle, they go to Plan B and look for used cars. Jominy said dealerships take a similar approach: “When dealers start to feel like there’s not going to be a unit to replace a unit that they’re selling, they change their behavior and quickly go to the used market. If there’s a threat to new supply, they’ll go over to the used side and get more aggressive with people trading in their vehicles or going to the auction lane.”
With the increased demand for used vehicles, the prices of used cars have risen substantially. According to Manheim’s used vehicle index, which tracks wholesale prices that closely resemble retail trends, May 2021 saw a whopping 48% used-car price increase from a year prior — a record high for the index. A recent inflation report from the U.S. Labor Department shows a 30% increase in used-vehicle prices over a 12-month period.
My Trade-In Is Worth How Much?!
Due to the growing demand for used vehicles, trade-in equity has seen a sharp spike in recent months, which offers some good news for shoppers navigating the current car-buying landscape. According to Jominy, trade-in equity for consumers is up 109% over the prior year, with an average of $6,200 offered. That’s a staggering increase of $3,000.
These generous trade-in values can offer some respite from the soaring used-car prices mentioned above. Although spiking vehicle prices remain a disconcerting reality, consumers might be able to make up some — or all — of the difference with their trade-in.
Cars With the Highest Trade-In Values
The amount a vehicle will yield in trade-in value depends on its age, condition and demand. According to Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, demand is likely to play the biggest role in the current environment. Crew-cab pickup trucks, as well as those with four-wheel drive and/or diesel engines, are bringing in more trade-in equity; so are some SUVs.
“If someone brings in a four-wheel-drive pickup truck with four doors, they’re going to give you a ton of money no matter how old it is or how many miles it has,” Fiorani said.
Get the Best Offer for Your Trade-In
All three experts we interviewed agreed that patience is key when shopping during a vehicle shortage, but patience also pays off when trading in a vehicle. In the current landscape, trying to negotiate on the price of a new or used car won’t get you very far, but you do have the leverage to negotiate with your trade-in value.
To get the best offer for your trade-in, Jominy recommends comparing multiple offers from dealers and used-car franchises like CarMax, both of which are getting more aggressive with trade-in offers.
More From Cars.com:
- How to Get the Best Offer for Your Trade-In
- Car Shoppers Face Shorter Supply, Rising Prices
- How to Sell Your Used Car
- First-Time Buyers: How to Sell Your Car
- How to Sell Your Car to Dealers and Get the Most Money
Related Video: Driving Smart: Prep Your Car for Sale
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