When Will Used Car Prices Drop? Watch for this Secret Signal.

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I’m down to owning a single car, which is probably a third-class felony in California. I want a second car, but they cost too much. I’m waiting for prices to drop.

Patience I must learn.

Like all decent, self-respecting Californians, my husband and I had three cars a scant six months ago. Yes, that’s one and a half cars for each of us.

For years we enjoyed a 2008 black Jaguar XK — my dream car — but by the time the odometer topped 140,000 miles, the battery could no longer hold a charge. Even so, any Jag that exceeds 100,000 miles should be in some sort of Jaguar Hall of Fame.

Then there was our 2004 Lexus RX 330, the greatest vehicle ever made. That baby has covered more than 300,000 miles, survived two kids and their carpool friends (the boys were gross), and the only thing we’ve ever had to fix outside of normal maintenance is the power steering. The Lexus is now sitting (mostly) unused in Kona; it’s earned a relaxing low-mileage retirement.

Now we’re left with a 2016 Corolla which serves its purpose of reliably transporting us from point A to B in SoCal. We need a second vehicle, because scheduling who gets the car every day requires a Google spreadsheet and a marriage counselor.

As you’ve probably figured out, my husband and I buy new cars, and we marry them for life. But since new car prices are so high, and because we’re so cheap, we started looking for a used car. Maybe some year-old lease return with relatively low mileage. This is where we expected to find the biggest bang for our buck.

Now, it’s just bang, as in DID YOU SEE THE PRICE OF THAT CAR?? BANG!!

The Bureau of Labor Statistics reports that here in automobile-loving Los Angeles, prices of pre-owned vehicles have expanded faster than a starlet filling up on collagen and silicone. (Okay, the government didn’t describe it that way.) Used car prices in L.A. jumped 39% in 2021, but it was worse nationally, up 41%.

There have been plenty of news stories explaining why. Used car prices are up because people can’t find any new cars due to the global chip shortage and other supply chain problems.

“Our average used car was $16,000 [a year ago], and right now it’s over $32,000,” says Clay Cooley of Clay Cooley Auto Group in Dallas.

That (… furiously pokes calculator) is a 100% jump in price.

Clay is the car guy in Dallas. He owns 10 dealerships. I met him while doing a story for CNBC on CarOffer, an online site matching dealers who want to swap inventory. CarOffer acts as a market maker, with over 10,000 dealers on board.

Clay was recommended to me as a longtime car guy who tells it like it is. And he does. He’s also a character.

His “Come See Clay!” commercials remind me a little of the ol' “Go See Cal” ads I grew up watching in SoCal by the legendary Cal Worthington (and his dog Spot!).

As I approached Clay’s headquarters outside Dallas on state highway 183 a few weeks back, the phrase “Everything’s bigger in Texas” came to mind. Outside his office stood six towering flagpoles, each a record-breaking 165 feet tall (according to Clay), supporting the largest flags I’ve ever seen. The whopping U.S. and state flags whipping in the dry Texas wind measure 80x40 feet. (The Texas flags were recently swapped out for ginormous custom-made flags of Ukraine.)

But Clay is also raising some red flags (transition!) about underreported reasons behind high used-car prices.

Here are three:

Clay says that during the pandemic, many banks stopped repossessing cars from people who failed to make payments. The expected “repo rebound” has yet to materialize. In fact, the government is warning banks to avoid doing anything illegal to grab cars and exploit high resale prices.

With fewer new cars, manufacturers have stopped selling to fleet companies — rental car agencies, corporate entities, even the government. Carvana recently pointed to a Cox Automotive report that says sales to fleet companies dropped 32% in December compared to a year ago.

Repos and lease returns are two sources of used car inventory for dealers like Clay, but he says “all the cars dried up.”

“Used car prices aren’t that high,” Clay tells me matter-of-factly, making one of my eyebrows arch to the moon. “What happens is, every new car that’s made has incentive money.”

This is his main point.

Incentives are money manufacturers give back to dealers to compensate them for discounting the price of new cars. This encourages dealers to make sales and move inventory in order to make room for the next batch of new cars. It’s why buyers almost never pay MSRP.

How much are these incentives? “A truck normally has $8,000 to $12,000 incentive money on it,” says Clay. So that new Chevy Silverado with a $60,000 sticker price will *only* cost around $50,000.

Those days are over. For now. There aren’t enough new cars available to create the need for incentives. Chevy can charge the full $60,000. Heck, you may have to pay $70,000.

So the incentive money has disappeared. And because the new Silverado is now $60,000 instead of $50,000, the used Silverado can be sold for $50,000 instead of $40,000.

When incentives return, this will be a signal that supply and demand are normalizing, and price should fall.

When will that be? Clay says he’s seeing a little incentive money trickle in — “$1,000 here, $1,500 there” — but nothing meaningful. The only reason there’s any incentive at all is because “you need a little money to help [buyers] on the negative equity.” Yes, buyers are losing so much money buying a new car right now that some manufacturers are trying to take the edge off.

Clay doesn’t expect to see traditional incentives return for a long time. “With Covid ‘zero tolerance’ in China and the Ukraine war, we are still seeing manufacturers shutting down.”

So I will practice patience and watch for the return of incentives. Meantime, I wish I could afford to sell the Corolla. I’d make enough money to buy a new one… whenever prices return to normal.

But I actually need to hold onto at least one car. Only a nobody walks in L.A.

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Cover image: new cars surround empty spaces at a Toyota dealership in Orange, CA/MediaNews Group, Orange County Register