by Ivan Drury, Edmunds' senior manager of insights

The auto industry took a big hit in the second half of March as most of the country shifted to shelter-in-place orders: Production of vehicles halted, showrooms closed, and sales dwindled. With shelter-in-place mandates expected to continue through at least May with no clearly defined end in sight, we can anticipate a trickle-down effect on the used market, particularly on used car values. Although used vehicle prices have risen steadily in the past few years due to a deluge of off-lease, option-rich SUVs and trucks hitting the used market, this trend is set to hit a turning point.

Recessions aren't kind to used car values
History has shown us that a sudden halt in demand for vehicles combined with overarching economic uncertainty will lead to an initial knee-jerk drop in used values. What we saw in 2008 was pretty severe: Three-year-old vehicles lost nearly 10% in value, whereas the year before they declined less than 5% in value.

Consumers who plan on selling or trading in their vehicle right now might be in for a bit of a shock
While this trend means shoppers in the position to purchase a used vehicle now will find some bargains, consumers who want to sell their vehicle for extra cash or trade it in toward another purchase might be surprised at the assessed value of their vehicle, especially if they're comparing current list prices to their offer. There are many factors at play that are impacting used vehicle values differently:

Reconditioning: There is time and cost associated with every trade-in, no matter the condition of the vehicle or the state of the economy. However, amid widespread stay-at-home orders and store closures, sourcing of parts and performing reconditioning will take longer than usual, which will factor into a vehicle's down time before it makes it onto the lot.

Current and forecasted levels of inventory for specific vehicles: The most popular leased vehicles are a strong indicator of which vehicles will drop the most in value because there will be a large supply available in the used market. Leasing has become prevalent over the last five years ― nearly 30% of all new vehicles sold are leased. The typical lease term length is three years, and we see the make and model mix of available 3-year-old vehicles change dramatically based upon these cycles. During 2015 the Nissan Rogue was the 12th most leased vehicle and jumped to the fourth most in 2016, while the Toyota Camry went in the opposite direction, from the third most leased to the 10th. These volume changes have effects on residual values that a consumer would never be aware of. Other market conditions are also a factor, but the volume changes in this example drove residual values for the Rogue down from 63% to 60% and the Camry up from 60% to 61%.

Current demand for specific vehicles: When making a trade-in offer, dealers evaluate current and future demand because they need to account for the time the vehicle is expected to sit on their lot and its depreciation while doing so. In 2019, the typical used car sat on a dealer's lot for nearly 40 days before it was sold; during the first quarter of 2009, one of the bleakest periods of the recession, that figure reached an average of 55 days. Unfortunately, during an economic downturn, especially one in which so many people have lost their jobs and have been placed under stay-at home-orders, demand is low for all products, not just cars. As a result, used vehicle appraisals will be significantly lower across the board.

Vehicle list price versus selling price versus trade-in value: When looking for comparable vehicles to gauge the value of their own, consumers must keep in mind that they're mostly seeing asking prices from sellers, not final transaction prices. While some dealerships provide no-haggle pricing meant to reflect the transaction price if a vehicle is purchased that same day, this doesn't mean that they don't lower prices over time. It only means consumers won't be able to negotiate a lower price than what is listed. This makes evaluating the prospective trade-in different from shopping for a used vehicle. However, numerous companies provide online trade-in evaluations and instant offers, and many dealerships offer to buy vehicles even without a purchase from their inventory. Consumers can get a good idea of what the trade-in market is for their vehicle by shopping a few sources and determining which blend of value and convenience is right for them.

The invisible market — auctions: While consumers might have some sense of visibility into all of the above, there is an entire ecosystem where millions of units exchange hands out of the public eye. Dealers often send used vehicles that have sat on their lots for 60-plus days to auction in hopes of at least breaking even on them. This reality is rarely on a consumer's mind when evaluating a trade-in offer.

This will be the new normal for used vehicles ... for now
Once the economy begins to rebound, used vehicles are often sought after as a place for consumers to save money when the nation is coming out of a recession. The last time around, we saw the following values as demand started to increase:

Most vehicles steadily lose value as they get older. Vehicle owners can expect the value of their vehicle to stabilize for some time once the economy starts to recover, but not necessarily rebound significantly. Consumers who sell their vehicle during a recession generally do so at a lower price. The loss of value is reflected on this graph ― the green dotted line represents what a vehicle would have typically sold for versus what it sold for in the recessionary period.

Although used car values aren't expected to significantly rebound in the short term, there are unique factors at play between the new and used market that could help create a lift. 2019 brought a record gap in new and used vehicle prices: the average transaction price for a new car reached $37,308, while the average 3-year-old vehicle sold for $22,459, a $14,849 difference. This gap allows for used values to increase without becoming a threat to new car values, and reduced wear and tear to vehicles as consumers drive less during this pandemic could also help elevate values slightly in the future.

There's no one-size-fits all answer for consumers contemplating selling their vehicle right now

If car owners are in need of quick cash, selling their vehicle is a good option if they have positive equity or if they have an extra vehicle in the driveway. According to 2019 registration data, there are 1.3 vehicles on the road for every registered driver in the U.S. so that's certainly a possibility that some households might consider. While current offers may be lower than expected due to the economic downturn, consumers should only move forward with a transaction if they're comfortable with the offer.