The unexpected twist in the used car market

From the outside, it may seem like the used car market is finally starting to stabilize after years of ups and downs. Prices are getting back to normal, as is demand.

But below the calm waters, there’s one particular segment that’s reaching a boiling point for customers, dealers, and manufacturers.

Big picture: To understand what’s going on with used EVs, it’s vital to understand where the rest of the pre-owned market is heading:

• Used car values are finally falling into a more ‘normal’ pattern of depreciation after years of a runup in prices, according to the latest research from Edmunds. 

• In Q2, pre-owned cars cost an average of $27,472, down 6.8% ($2,000) year-over-year and down 11.1% compared to Q2 2022.

• Used cars sold in Q2 were 4.5 years old on average, up from 4.3 years in 2019.

Zooming in: These trends are what the industry has come to expect from the used vehicle market since the COVID-19 pandemic. EVs, on the other hand, are behaving very differently from internal combustion engines (ICE) and hybrid products.

• Used EVs are depreciating much faster than the overall industry average. They lost a staggering 20.5% ($8,695) of their value between 2023 and 2024.

• To put this into perspective, preowned EVs cost around $13,100 more than the typical used ICE vehicle in 2023. This year, that gap has shrunk to just $6,396.

• Battery-powered vehicles are also selling earlier than ICE or hybrid vehicles. Used EVs sold in Q2 were around 2.7 years old – a much shorter turnover cycle than the average ICE.

The culprit, much like it is for the rest of the industry, is the new vehicle market.

• New car prices have declined slowly over the last year, allowing some pent-up demand to overflow from the pre-owned side. This has lowered supply pressures for used vehicles, allowing values to come down.

• New EVs are also getting cheaper due to consistent price cuts from market front-runner Tesla.

• This has caused depreciation for pre-owned EVs to spiral – much to the frustration of current owners.

Why it matters: Dealers selling used EVs now have several value propositions to leverage. In addition to a max. $4,000 used EV tax credit if eligible, average monthly payments for a financed used EV ($573) was only $20 more than a used ICE car ($553). But get this — pre-owned EVs are nearly half the age of ICE cars, which means that customers can get a newer vehicle in better condition for virtually the same monthly price. It’s a lower-risk way for EV-curious buyers to try things out. 

What we’re watching: Dealers may struggle to price used EVs correctly due to the $25,000 tax credit eligibility threshold. Selling above this amount forfeits the rebate, while going below may not guarantee qualification depending on the buyer. To avoid selling below market value, dealers must be mindful of depreciation and train staff to manage customer expectations regarding trade-in values. Otherwise, consumers will feel their salesperson is “low-balling” their offer.

Bottom line: The used car market, as a whole, is showing signs of incredible stability given everything it has been through over the last few years. But in spite of the broader trends of “normalization,” the EV market continues to be full of surprises.

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