The automotive market is bracing for further turbulence, and it’s not solely due to tariffs. While New Car Sales hit their lowest point in 2022, a year marked by pandemic-induced supply chain disruptions, this downturn is now creating a ripple effect that will impact the used car market and, conversely, potentially boost new car sales.
The automotive industry recognizes the three-year-old vehicle as a sweet spot in the used car sector. These cars have undergone substantial depreciation, making them more affordable, yet they typically retain considerable lifespan and reliability. However, in 2025, the availability of these sought-after three-year-old vehicles is projected to be significantly reduced.
Edmunds, a prominent car shopping and automotive information platform, anticipates a notable scarcity of three-year-old cars in 2025. This projection stems from the low volume of new car sales in 2022, which totaled just 13.8 million units – the lowest since 2011, during the aftermath of the Great Recession.
Brian Moody, executive editor at Kelley Blue Book and Autotrader, notes, “We kind of have known since COVID that that was an impact that was coming.” This anticipated shortage is largely attributed to the sharp decline in new car sales during 2022.
Lease Returns to Plummet, Further Tightening Used Car Supply
The anticipated scarcity in the used car market is further exacerbated by a significant drop in vehicle leases in 2022. Leasing activity experienced a sharp decrease that year, and as these vehicles typically re-enter the used car market after three years, the impact will be felt in 2025. Edmunds forecasts that leased vehicles will constitute a mere 18% of used car sales in 2025, marking the lowest point since the Great Recession.
Between 2019 and 2022, the used vehicle market benefited from an annual influx of over 4 million off-lease vehicles. However, this figure is expected to plummet to approximately 2 million this year, according to Edmunds’ projections. “A lot of those aren’t coming back because they weren’t leased in the first place,” Moody explains, highlighting the direct link between lower lease originations and reduced used car supply.
Ivan Drury, director of insights at Edmunds, emphasizes that the shortage will extend beyond just lease returns. “If you are going to be in the used car market in 2025, you will come across far fewer nearly new used vehicles, vehicles that are two years old, three years old, four years old,” he states. These “gently used” vehicles are consistently popular due to their remaining warranty coverage and more accessible price points compared to new cars.
Used Car Crunch Arrives Amidst High New Car Prices
This impending inventory crunch in the used car market arrives at a particularly challenging time for consumers. New car prices remain elevated, with the average new vehicle price in January reaching nearly a record high of $48,118, as reported by Edmunds. While used car prices are lower, averaging $24,402, the anticipated scarcity could drive these prices up, narrowing the gap with new car prices and potentially making new car sales more attractive.
Furthermore, ongoing trade tensions and tariff threats add complexity to the automotive market. While the auto industry has seen temporary exemptions from tariffs, the potential for increased import costs remains a concern, particularly for new vehicles with international supply chains.
Jessica Caldwell, head of insights at Edmunds, points out the precarious situation: “A one-month exemption offers a welcome reprieve, but the looming threat of tariffs still hangs over the automotive industry like a dark storm cloud.” Should tariffs be implemented, the impact could disproportionately affect more affordable new vehicles, potentially pushing consumers towards the used market, further straining supply, or, conversely, encouraging buyers to consider new car sales if incentives and financing options become more favorable for new vehicles.
David Bennett, manager of repair systems at AAA, suggests that tariffs could indirectly influence the used car market by impacting new car affordability. “It shouldn’t impact used cars that much unless people start buying used cars because they can’t afford new cars,” he notes. However, if tariffs significantly increase new car prices, it could create a scenario where new car sales become relatively more competitive, especially if manufacturers offer attractive financing and incentives to maintain sales volume.
Given the anticipated shortage of gently used vehicles, prospective car buyers may need to explore alternative strategies, some of which could directly benefit new car sales.
Consider Buying a New Vehicle: Bridging the Price Gap
With gently used car prices expected to remain high due to limited supply in 2025, the price differential between used and new vehicles may become less pronounced. Ivan Drury from Edmunds suggests that buyers will find used car prices “butting up against new car pricing.” In such cases, purchasing a new car becomes a more compelling option.
New car dealerships often provide incentives such as discounts, typically ranging from $1,500 to $2,000 according to recent data. Moreover, financing for new vehicles often comes with more favorable interest rates. Dealers frequently offer promotional rates that can be as low as 2% or even lower for new car sales.
In contrast, the average interest rate for a used car loan is significantly higher, around 11.3%, according to Edmunds. Alex Knizek, associate director of auto test development at Consumer Reports, highlights this shifting dynamic: “Our intuition says that buying used is always cheaper than new, but it may not always be the case.” The combination of potentially smaller price differences, new car incentives, and lower financing rates could make new car sales increasingly attractive in the face of a constrained and potentially overpriced used car market. This scenario presents a significant opportunity for the new car market to rebound and capitalize on the changing market dynamics.
