The Effect of a Recession on the Car Market: New vs. Used Cars

A friend of mine just sold his 8-year-old 2 series for close to the original purchase price. It’s absolutely insane what people are putting out for used cars.

This leads to the question, "What will it take for car prices to return to normal?"

The answer is, in short: This IS the new normal for car prices. You're going to have to get used to it.

“Compared to a few years ago when I used to pay $4,000 underneath MSRP, this ‘new normal’ will see an above-premium on cars for a long time,” Zak Sabbagh Chief Product Officer at Leasly said. “However, I do see a correction happening. These ridiculous corrections with $10,000 over MSRP will eventually come down over time and I can see that already in the used car markets.”

The good news, well, maybe not good news, but at least it's something, is that new and used car prices WILL eventually come down if we go into a recession, which as of recent headlines, Citi Bank warned of a 50% chance of happening.

A recession and people losing their jobs would certainly change car prices, and here is how you can benefit from that.

How the Car Market Reacts During a Recession

A recession will crater the used car market. If 2008 is any to go by, people will dump gas guzzlers and their second vehicles just to come up with cash for the mortgage.

“We’ll likely see luxury car prices go down first as we head into this recession, but those mid-budget Japanese cars are going to stay expensive due to demand."

- Zak Sabbagh

A recession, however, isn't gonna make prices drop immediately as it does make other markets crash like the stock market, for example. It will take a few months for the effects to trickle down to the car market as people have time to react and change their plans.

Once people start losing their jobs, they will put off buying a car for as long as possible because it is a large purchase.

You won’t see much decline for 10-year-old Civics/Corollas because those are the cars people flock to in recessions. Americans will need low-maintenance, cheap, fuel-efficient, and reliable vehicles, not mid-size SUVs, sports cars, and Texas-sized trucks to haul groceries in.

It will be a great time to buy anything except a 10-year-old Corolla.

Car Enthusiasts Will Defend This

Gas prices seem high, but adjusted for inflation it is still below 2008.

Also, there is a huge spread where oil isn't actually catastrophically high but gas is, much higher than it should be compared to oil.

Car enthusiasts will point to this as a reason why people don't need to panic and that things aren't as bad as they seem.

But, the fact is, people don't care about adjusting for inflation gas prices. They just see the number on the pump and freak out. And you can't blame them, it's not like the quality of life has increased to make up for the high prices.

Besides, 2008 was a quick spike and crash, which minimized total economic damage. This is a long period of high gas prices due to fundamental supply constraints. It will be much more devastating, especially if a recession doesn’t bring prices down.

Survive, By Any Means Necessary

The first lesson you learn in stock market investing is "When everyone is greedy, be fearful. When everyone is fearful, be greedy."

(Maybe it's not the first lesson, but it's still important!)

The same could be said for the car market.

When everyone is buying and selling cars for way more than they're worth, it's time to be fearful. But, when everyone is afraid to buy or sell cars, that's when you need to be greedy.

Of course, this is all easier said than done, but you've now read this article. You know that a recession is coming. You're prepared.

Now go out there, whether you're a customer or a dealer, and get the best deal possible. By any means necessary. (Ok, maybe not by ANY means necessary. But you get the idea.)

Thanks for reading!

-Leasly