KEY POINTS:
The car market naturally creates compression zones of new cars pushing the values down and even older cars holding the values up.
Depreciation is not linear
When identifying a compression zone, look at the next $5k price block to see what opportunities there may be
Leverage this info as a buyer, owner, or seller to lose less on your car.
So we ‘ve learned that cars slot into their respective $5k price blocks. We also understand that, while cars depreciate, the “sandwich” principle shows us that car values are held up from the bottom while being pushed down from the top.
But here’s the third bit of info you need to grasp the big picture when understanding the entire used car market’s pricing schematics: the compression zone.
DEPRECIATION IS NOT LINEAR
Naturally, the way a car depreciates is not the same for year 1 vs year 6. For example, a new car depreciates the heaviest in the beginning. Then, from years 3-8, the depreciation becomes fairly linear. But after that, the depreciation slows down considerably the closer the value gets to $0.
(Fun fact- cars never go down to $0 of value. There’s always some level of value, whether for scraps or parts.)
HOW THE COMPRESSION ZONE STARTS
So consider this- a 2026 Honda Civic LX has an MSRP of approximately $26,000. So that’s at the top of the food chain. But 30yr old Civic’s still exist and need to slot somewhere.
If a 2026 is $26k, and the used car market works in $5k price blocks, where does a 30yr old car go? Right to the bottom in the $0-5k block. But what about a 25yr old Civic’s? They go in the same price block. What about 20yr old Civic’s? Typically in the same price block as well.
When a 2014 Civic with 120k mi is still a $10k car, it means you still have multiple generations of Civic’s that need to slot in somewhere between $0-10k. Because of the amount of overlap that exists, we call this the compression zone.
DYNAMICS OF THE COMPRESSION ZONE
Like a black hole, cars found in the compression zone are trapped, pulled by the gravity of depreciation, and yet held up by older cars ever so slightly to float to the top of the compression zone. Ultimately, these cars share in the abyss of the bottom of the car market with much older variants of itself.
Ok, that’s a bit dramatic. But when you have a strong understanding of what that means, you’ll see where the opportunities are. You will witness three dynamics:
Dynamic #1 - $10k is the strongest ceiling
Due to many new cars priced in the $20k range, $10k becomes the strongest ceiling, as there’s only so far a car can get to $0 before being lifted back up by older variants.
Dynamic #2 – Cars in the next price block ($10-15k) dramatically get better in quality
The difference between a $10k car and a $12k car is bigger than any other $2k difference. Not only are we talking about two different $5k price blocks, we’re also talking about going right above the strongest ceiling in the used car market.
Dynamic #3 – Due to these cars’ inability to drop further than $0, this is where condition starts to matter more than the age.
There are two types of depreciations- time and condition. At this point, time has taken its course and the car’s condition starts to matter more.
TAKE ADVANTAGE OF THE COMPRESSION ZONE
So now what do you do with this info? Allow me to show you some data using the “sandwich” of our good ole Honda Civic example:
2026 Civic LX – Original MSRP of $25,890 (between the $25-30k block)
2023 Civic LX w/ 30k mi - $21,000 (between the $20-25k block)
2020 Civic LX w/ 60k mi - $17,000 (between the $15-20k block)
2017 Civic LX w/ 90k mi - $14,000 (between the $10-15k block)
2014 Civic LX w/ 120k mi - $10,000 (between the $5-10k block)
2008 Civic LX w/ 50k mi - $8,000 (between the $5-10k block)*
2011 Civic LX w/ 150k mi - $7,000 (between the $5-10k block)
2008 Civic LX w/ 180k mi - $4,000 (between the $5-10k block)
2005 Civic LX w/ 210k mi - $3,000 (between the $0-5k block)
2002 Civic LX w/ 240k mi - $2,000 (between the $0-5k block)
1999 Civic LX w/ 270k mi - $1,500 (between the $0-5k block)
1996 Civic LX w/ 300k mi - $1,000 (between the $0-5k block)
From this list, the cars in bold both exist in the $5-10k price block, right below the ceiling.
We can also see the last five cars land in the $0-5k price block.
But what about the italicized car? This nearly 20yr old car with only 50k mi. What do we do about this? It can’t go higher than $10k because of the glass ceiling. It can’t go lower than $5k because of the way older variants underneath. It gets stuck somewhere between $5-10k because of condition.
So here are the tips:
THE BUYER’S OPPORTUNITY
Depending on what kind of car you’re looking for, understand what holds up the bottom of the market. This will allow you to choose the right car at the right price point.
When the Ford Maverick first launched, there were hybrid variants with an MSRP of $21k. I knew right away that a car like that would hold value insanely well because of all the other trucks that held up the $0-20k market.
By working your way up from the bottom, you can understand how cars will depreciate in the future.
If shopping below the $10k threshold, look for the outlier cars like the italicized one. Though older, you’ll be able to put significant miles on for very little dollars.
Avoid the compression zone entirely by shopping above it. If you buy the 2017 Civic for $14k, put approx. 3yrs/30k mi on, and exit at the top of the compression zone where those cars look attractive to those shopping in the $5-10k space.
Don’t buy in the middle of the compression zone. It’s a convoluted space where the quality of car varies so much that you’re most likely better off going above or below.
THE OWNER’S OPPORTUNITY
Plan your exit based on the market comp’s. By knowing what holds up the bottom of the market, you can plan your exit by utilizing the 5k price block understanding.
If you have the italicized outlier car, then put some miles on it for cheap! Or position your car to the top of the price block.
Exit sooner than later. While it can look like miles are cheap between the various cars at the $0-5k price block, there’s a lot more risk. A $500 repair here. A $1000 repair there. At some point, you will be forced to sell because of diminished returns on your upkeep costs. Rather, sell at the highest point of the $0-5k price point and find a new car.
THE SELLER’S OPPORTUNITY
Look at the comp’s and see what you’re positioning your car up against. By understanding the bottom of the market (and making your way back up to where your car’s value is), you can clearly see what competition you have (from the top and the bottom) to position your car accurately and competitively.
Imagine you have a car worth $12k and you’re prioritizing getting the most money out of the car, hold above $10k (no need to drop below because similar cars under $10k will be in way worse condition) and show your potential buyers how your car is worth significantly more than those in the next price block below.
If you want to prioritize speed in the sale, position your car against the comp’s at the high point of the next lower price bracket. For example, let’s say your car’s comp’s are at $11k in similar condition, set your sale price to $9900 (to undercut the $10k barrier) but hold firm. This strategy should net you more inquiries and a faster sale.
Understanding the bottom of the car market is just as important as understanding the top. The ability to “work your way up” (utilizing data of what kind of cars exist under $10k) will only help you be more strategic about the cars your buy, how you own, and when/how to sell.
