There’s one thing that’s almost certain in the car market. In all but a few cases, your car will be worth less when you go to sell it than it was when you bought it. While market disruptions stemming from the Coronavirus pandemic upset that dynamic for a few years, we’re now returning to a marketplace where the old rules will once more apply.
Valuation companies have been predicting the future values of cars for decades, and for traditional gas-powered vehicles, they’ve gotten very good at it.
Electric cars are a different story, however. While predictions have improved since the early days of EVs, it’s simply harder to predict their future value.
We recently spoke with Eric Lyman, the vice president of ALG, a part of the J.D. Power company, to learn how the used EV marketplace is different and what companies are doing to better predict used electric vehicle prices.
ALG helps automakers set the residual values for their leased vehicles. It’s a critical figure when determining lease prices, and can help car buyers get an idea of what they should pay for a used car. The values are based on historical data adjusted by nuances in the marketplace.
“With electric vehicles the same principles apply,” said Lyman. “However, there’s a few key things that are very different and/or missing.”
New EV Prices
One of the most significant factors that go into the value of a used car is its price when new. The volatility of prices in the marketplace over the last few years has been nothing short of extraordinary, with market disruptions and supply chain challenges causing most new car prices to climb steadily. Used car prices followed, reaching record highs that have only recently started to ease.
That is until Tesla threw a curveball at the entire EV industry by dropping prices on their entire lineup of electric cars by thousands of dollars.
“When there are sort of overnight changes in the magnitude of thousands of dollars in the MSRP, we certainly have no way to predict when those will occur or the magnitude of what those changes will be,” says Lyman. “If you’re going to talk about challenges of EVs, I would put that near the top of the list, only because of how influential Tesla is in the EV market space when it comes to both optics and share of EV sales.”
Only a few years ago, if gas prices spiked, we’d be talking about the rising cost of used Toyota Priuses. Today, rising gas prices are just as likely to raise the cost of used electric vehicles. As fuel prices ease, so do the prices of pre-owned electric cars.
While a rise in fuel prices might not get many consumers to rush out and buy a different vehicle, it can influence the type of car they buy if they’re already considering a purchase.
2022 Tesla Model S ExteriorTesla Inc.
As the electric car market begins to mature, the range of EVs is improving. While just a decade or so ago, the longest-range EVs could go about 100 miles on a single charge, some of today’s electric vehicles can go as far as 500 miles before needing to plug in.
The range that seems to satisfy most of today’s EV buyers is about 250 miles, which is about how far most cars can travel on a single tank of gas in a traditional vehicle. If a used EV has less than 250 miles of range, its value will likely be lower than one with greater than 250 miles per charge.
“What we see as sort of the standard baseline for EVs is about 250 miles,” said Lyman. “Which obviously Tesla has had for a long time. It’s one of the reasons Tesla has always had such a strong position among EVs, relative to many of their competitors.”
Battery Condition and Life
While new-car buyers can simply look at an electric vehicle’s EPA-estimated range and get an idea of what they can expect, it’s not so simple for buyers of used EVs. That’s because electric car batteries degrade over time, and don’t provide the same range as they age.
“We are eagerly awaiting the day when we have enough used market range data to understand how the variability vehicle to vehicle with range can impact value,” said ALG’s Lyman.
How many fewer miles can they go? That’s hard to predict because so many variables are involved. Battery life can vary by when the battery was manufactured, how often it has been fast-charged, where and how the vehicle was driven, whether it was charged to 100% every day or used in the middle of its capacity and a multitude of other factors.
In fact, some researchers contend that how an EVs battery was cared for has a more significant influence on value than the number of miles it was driven. According to Scott Case, the co-founder and CEO of the EV research firm Recurrent, “Odometers are the rule of thumb that has always been used to determine the value of a used car – but it simply doesn’t make sense with electric cars.”
Preeda Prakotmak / EyeEm / Getty Images
To spur the adoption of electric vehicles, governments on several levels and utilities have offered incentives. The largest program is the Federal Electric Car Tax Credit, which provides up to a $7,500 tax credit to qualifying buyers of certain electric vehicles.
If a vehicle is eligible for the credit, its price as a new car is effectively lowered. When that happens, its value in the used car market drops along with it.
For years, the Federal EV tax credit program was relatively stable, with all but a few electric cars, trucks and SUVs qualifying. That all changed with 2023’s Inflation Reduction Act. It’s still unclear which vehicles will qualify, though we know that any car priced higher than $55,000 and any SUV with an MSRP higher than $80,000 will no longer get their buyers the credit. Further, any EV not built in North America is no longer eligible.
Vehicles that lost their eligibility effectively saw up to a $7,500 price increase when the act’s various requirements took effect. When the prices of those new cars went up, so did used car prices. A few new EVs, notably certain models from Tesla and Chevrolet, saw the return of credits they previously lost, which caused a ripple that reduced the used car prices of those models.
There is an important caveat here, though. Under certain circumstances, the act now allows buyers of used EVs to qualify to get a tax credit. Buyers of those vehicles received an effective price drop.
F-150 Lightning Trucks Lined-up for ChargingFord Motor Company
When you’re the only kid on the block, your lemonade stand gets to set the price, and thirsty customers can take it or leave it. That’s the situation Tesla had in the EV market for the better part of the decade. Today, there’s a lemonade stand in front of almost every house, and even that first lemonade stand has to battle for sales.
When many players are in the game, there’s pressure to lower new car prices to compete. And as we know, lower new car prices mean lower used car prices.
There are some segments where used electric vehicle prices are still very strong. For example, the electric pickup truck market hasn’t spun off enough used electric trucks to combat the high prices that scarcity demands. That will change as more electric pickups hit the road.
“For the past few years, ALG has had what we call a scarcity factor in our EV forecast that’s applied to the overwhelming majority of EVs,” said Lyman. “That sort-of scarcity in the market has elevated values. Now that we’re seeing growth in EV volume, there has been growth in demand as well. But we expect that over the next few years that supply will grow at a faster rate than the demand. That will reduce some of the premium that we’re seeing in EVs related to the scarcity factor.”
Macroeconomic Conditions and the Pandemic
There are broader market forces that affect all cars in the marketplace, though they might hit the EV segment a bit harder as automakers try to get new products out the door.
Higher interest rates reduce demand, which lowers prices across the board. After a decade of low-interest rates, today’s car shoppers aren’t excited about rates closer to the historical average and may put off buying. Even if they do buy, they may purchase less expensive models in an effort to keep their payments within their budgets.
Not even the most forward-thinking forecaster could have predicted the effects of the pandemic and the ensuing hangover on supply chains. Lyman says that after missing predictions early in the EV movement, the company’s forecasts about used EV prices were getting more accurate.
“Our accuracy was really good, actually,” he says. “We had a lot of the variables under control. When we get the pandemic, and everything goes crazy. Our values, just like everybody else’s, have been really skewed from an accuracy standpoint since the pandemic hit.”
However, they believe value predictions will improve in the next few years.
“We believe we have a pretty good handle on what the new normal will be,” Lyman says. “2023 is expected to be the biggest adjustment from where we have been for the last couple years to where we believe the new normal is.”
What Does This Mean if You Want a Used EV?
Like any used car purchase, your success is based on taking a measured, step-by-step approach to buying, and not purchasing a used car on a whim. You’ll want to know everything you can about the used car by studying its vehicle history report and getting a thorough pre-purchase inspection by a mechanic who understands electric vehicles.
It’s essential to cast a wide net and compare prices among the vehicles available in the marketplace. Look at what’s happening with the costs of new cars in the segment you’re considering, and you’ll get a signal about where used EV prices are headed.
Like any car purchase, you’ll want to have a pre-approved financing offer from a bank or credit union in your pocket before you start shopping. Unless you have an offer in hand, the dealership you buy from won’t have any incentive to offer you a good financing deal.