Energy Musings - September 9, 2024

New car dealers like a healthy used vehicle market because it helps trade-in values that can boost new vehicle sales. The free-fall of used EVs has dealers worried as well as owners.

Another Challenge For EV Owners

The July Consumer Price Index (CPI) was helped by falling vehicle prices.  The category’s decline was the most of any major category in the CPI.  Used car prices fell 2.3% in July compared to June and 10.9% from the prior year.  In July, new car prices declined 0.2% month over month and 1.4% from the prior year.  Falling vehicle prices helped hold the July CPI’s monthly increase to 0.2% and 2.9% from the prior year.  Falling below the 3% mark was heralded as significant and continued the momentum calling for a cut in the Federal Reserve’s interest rate. 

The used car market has been a study in government-driven demand response and a correction when that pressure subsided.  The government economic shutdown in 2020 in response to the COVID-19 pandemic created an unusual demand for vehicles at a time when inventory shrank.  With few new vehicles available, buyers were forced to bid aggressively for quality used cars.  The result was that in both June and July 2021, used car prices rose more than 40% annually.  The same thing happened again in January and February 2022.  Used car prices peaked in February 2022.  They have now fallen 19.4%. 

For electric vehicles (EV), used car prices have been in a free fall.  According to car data service company Edmunds 2Q 2024 report, used EV values have plunged by 20.5% year over year.  Their data shows that the overall used car market had declined 6.8% over the same period.  However, comparing used-EV values over the two years 2Q 2022 to 2Q 2024, they are down 38.5%. 

Used EV values have been in a free-fall upending their sales and those of new EVs.

Edmunds made the point that the two year-value comparison is impacted by the maturity of the EV industry.  In 2022, there were few good used EVs on the market.  Most automakers were not building long-range EVs or had just started production.  Therefore, there were few quality-used vehicles available leading to higher prices.  Edmunds pointed out that the majority of Teslas ever sold were sold in the last four years. 

The bigger problem is that the push to sell more EVs has led to manufacturers aggressively cutting prices and incentivizing new EV sales to compete in a market that is not growing as fast as anticipated.  Edmunds also cited heavy tax credits for new car leases and high interest rates on used-car loans as reasons why it makes more sense to buy or lease a new EV rather than a used one.  This is true even if the used car sells for thousands of dollars less.  This dynamic is putting pressure on the used EV market. 

According to the Edmunds report, “This news shouldn't surprise anyone in the automotive industry, as we’ve seen automakers utilize virtually every incentive under the sun to move stale new-EV inventory."  The Edmunds' report also stated, "With those new-EV price cuts occurring directly as a result of cash incentives and MSRP reductions, as well as heavily subsidized leases that also allow the use of the Inflation Reduction Act tax credit, the trickle-down effect on the used vehicle market has been pronounced." 

The used EV tax credit is also helping to push down prices.  The $4,000 tax credit only applies to EVs sold for under $25,000.  As the Inside EVs article noted, if a dealer has a used EV priced at $26,000, discounting the price by $1,000 has the effect of lowering the cost for a buyer by $5,000.  Presumably, dealers will have more buyers interested at the $21,000 effective price than at the $26,000 level.  For used EV pricing, this incentive has the effect of pressuring EV values. 

These pricing pressures come at the same time we see the results of the AAA Northeast and Pew Research Center surveys of automobile customers indicating little interest in buying EVs, even among current EV owners.  We wonder how EV interest will change as state governments realize that they need to raise taxes on these vehicles because they are not contributing sufficiently to the funding of highway maintenance.  With various states experimenting with mileage tax schemes, will car buyers find another excuse to pass on EV purchases? 

This doesn’t address the sky-high costs of EV insurance because of their higher initial purchase prices compared to gas-powered vehicles and the challenges in repairing them.  These are just a couple of additional considerations impacting the pace of the EV revolution that receive little attention from the media.  Add in the lack of public charging stations, and the emergence of “charger hogs” who restrict access to these chargers, adding to frustrations for EV owners lacking home charging stations.  

There are few signs of upward pressure on used EV prices.  What will help them will be comparisons of past periods already experiencing declines.  In other words, when the comparisons become easier, the prospective pain in the used EV market will moderate and disappear from the news.  Such a disappearance might cut both ways – news of cheaper EVs might stimulate buyers, but the absence of such news might have buyers ignoring the opportunity.  None of this will reverse the EV market slowdown.