KEY POINTS:
$20K is the old $10K
The 3 I’s paint the post-COVID story
The challenge of the $20K market: new cars
Major opportunity found in the $10-20K market for cheap driving
While we usually focus on the used car market $5K price blocks at a time, there’s a weird dynamic happening in the market as a result of a post-COVID, global economy-changing world.
Let’s quickly recap what happened:
Before COVID, a 3 year old Honda Civic was a $13K car.
After COVID, a 3 year old Honda Civic is a $21K car.
What changed?
POST-COVID Market
These dynamics require more explanation, but here’s the short version. I’ll use the “3 I’s” to assess the car market space:
Inventory – during COVID, we had a massive loss of inventory. Simple supply-demand dynamics followed. Used car pricing went through the roof.
Interest – rates were initially low, buying power went up, and demand shot up. This, combined with COVID stipends, killed supply. Countermeasures were employed and now rates are higher with less buying power from the masses.
Inflation – towards the end of COVID, inflation went through the roof. MSRP’s of new cars adjust for this. In addition, the dollar has become weaker.
The combination of these dynamics resulted in more-expensive new-cars, which creates headroom at the top of the market, and shifts within the used car market.
THE CHALLENGE OF THE $20K MARKET
The biggest issue with cars at $20K is that there are brand new cars right above it.
For example, a 2021 Civic is $21K but a brand new 2026 model is $26K before discounts and better financing terms. Do you see the issue here?
A car needs to depreciate and separate itself from its new counterpart in order to show its value. But because there are so many cars that hold up the bottom of the market, there’s only so much room for these cars to depreciate.
It’s been harder than ever to recommend for people to buy slightly used cars. They’re just too close to the price of a brand new one.
DEPRECIATION SLOWS DOWN CONSIDERABLY BELOW $20K
The silver lining to these new market dynamics is that car depreciation has slowed down more than ever.
What this means is that you can use the car for less money between the $10-20K space because of how well the values hold.
There’s opportunity here.
Take the Honda Civic again, for example. You have 10+ year old cars still selling strongly right around $10K. So you have 16 model years of Civic that need to fit between $10-20K. Do you see the picture?
At these numbers, you can buy a brand new Civic for $26K and it would take you 13 years and 130K mi to drop it another $16K- that’s huge. Before COVID, it would only take 6 years to get the Civic to $10K. These are unprecedented numbers.
MAJOR OPPORTUNITY
So while I don’t recommend a 3 year old Civic over a new one, you can certainly pick up a low mileage 6 year old car around $17K, put 70K miles on it and sell it for approx. $10K.
Anytime you can average anywhere close to $1000 per year of loss on a car, you’re golden.
To me, COVID has created massive opportunities for cheap driving- we just need to look at the right numbers to find the opportunities.
