Key Takeaways
Car companies have dropped prices on new EV models to sell them, making them competitive with the used EV car market.
Some EV owners now owe much more on their loans than their car is worth.
Prices for used electric vehicles have also fallen due to tax system distortions.
EV buyers and dealerships are switching to leases, with lease sales at dealerships jumping from a 16% share to 77% this year.
Through a loophole in the Inflation Reduction Act, leases are considered “commercial” and therefore are available for more tax benefits across a wider range of vehicles.
A recent article from the Wall Street Journal highlights a significant decline in the resale values of electric vehicles. Two years ago, certain used electric models were fetching prices equal to or exceeding those of new vehicles, driven by supply chain disruptions that led to a car shortage. Now, dealerships are overflowing with unsold electric cars, prompting manufacturers to reduce prices on new models to stimulate sales. These price cuts have positively impacted sales figures; for instance, financing incentives boosted Tesla’s global deliveries in the third quarter, reversing earlier declines. However, these discounts have also caused the prices of used electric vehicles to drop, compounding the difficulties facing the auto industry as it grapples with the transition to battery technology and electric vehicle production. Many consumers are becoming disillusioned with electric technology due to inadequate charging infrastructure and other concerns surrounding electric brands. Despite these challenges, the Biden-Harris administration has set a goal through EPA tailpipe emissions regulations for two-thirds of new car sales to be electric by 2032.
According to the Wall Street Journal, in September, the average selling price of a three-year-old electric vehicle stood at approximately $28,400, which is lower than that of a gasoline-powered car of the same age and represents a 25% drop since the start of 2023. This significant decrease in the value of used electric vehicles contrasts sharply with the traditional used-car market, where values have remained relatively stable during the same timeframe.
Tesla, the leading electric vehicle manufacturer globally, slashed prices by up to one-third on select new models in the U.S. last year, prompting other automakers to follow suit with their own price reductions. Additionally, in January, rental company Hertz sold off a significant portion of its Tesla fleet onto the used car market after finding that electric vehicles were underperforming in rentals, further driving down prices. According to the Wall Street Journal, the average listing price for Tesla’s most popular models, the Model 3 and Model Y, fell by about 25% over the past year.
While the drop in used electric vehicle prices might make them more appealing to potential buyers, many current owners who paid a premium for their cars now find themselves in a difficult position, owing more on their loans than their vehicles are worth. As the Wall Street Journal notes, normally, buyers gradually build equity in their vehicles as they make loan payments, but the reverse has happened to some EV owners because of the price reductions, making some vehicles worth less. For example, at the start of this year, the value of a 2018 Tesla Model 3 had dropped so much that it was worth $10,000 less than what was owed on the loan. An Edmunds study of EV trade-in values showed that in August, owners on average owed about $10,000 more than the car was worth—up from about $8,000 at the start of 2023.
As interest in electric vehicles has waned this year, automakers have ramped up sales promotions for new models, offering attractive leases and low-interest financing that draw demand away from the used market. Some brands have begun applying the $7,500 tax credit available for electric vehicle purchases directly to lease agreements, making new electric vehicles more financially appealing. Consequently, the average monthly payment for an electric vehicle lease dropped from $950 at the start of last year to $582 by August, comparable to what one would pay monthly for a $28,000 used electric vehicle. The primary competition for a one- or two-year-old used electric car now comes from new models.
Leasing has surged in popularity as a method for acquiring new electric vehicles. The Biden-Harris Treasury Department found a loophole in the Inflation Reduction Act that allows for the full tax credit on EV leases by classifying them as “commercial clean vehicles,” thereby bypassing North American manufacturing, material sourcing, income, or price restrictions. Last year, leases accounted for 16% of electric vehicle sales at dealerships; today, that figure has skyrocketed to 77%, as reported by the Wall Street Journal.
This rapid growth in electric vehicle leasing may have long-term ramifications for the market. While it helps manage current inventory challenges, it could lead to a surge of used electric vehicles flooding the market in two to three years. This influx could exert additional downward pressure on prices, leaving automakers and lenders—who hold the leased vehicles—responsible for any losses due to sharper-than-anticipated declines in resale values.
The preowned electric vehicle market has also been impacted by a new federal tax credit for used EV purchases, as reported by the Wall Street Journal. This $4,000 credit, introduced early last year, applies only to electric cars priced under $25,000, prompting some dealers to lower their prices to meet this threshold. For instance, a major dealer group in Michigan has seen sales of over 200 used electric cars per month, a notable increase from the previous year, though these sales are occurring at lower prices than originally planned.
Auto executives overestimated consumer interest in the electric vehicle market, as Biden-Harris regulations imposed ambitious EV targets. This miscalculation is affecting both new and used electric vehicle prices. In response, automakers are scaling back their targets by reducing production and postponing expansion plans. The Wall Street Journal notes that some companies are also taking measures with their EV leases to help maintain resale values.
Conclusion
Biden-Harris regulations and standards have caused automakers to rush into the EV market only to find that buyers are not as interested as had been expected. Dealerships became overloaded with electric vehicles and had to cut prices to increase sales. Now, used electric vehicles are competing with brand-new ones, which has resulted in price reductions that have been extended by a tax credit for used electric vehicles from the Democrat-passed Inflation Reduction Act. Leasing has also been affecting the market as the Biden-Harris Treasury Department used a loophole in the Inflation Reduction Act to give all leased electric vehicles a full tax credit. But leased vehicles can also be a future harbinger to the used EV market when they are returned to the dealership in 2 to 3 years, similar to the effects on the market when Hertz flooded it with used electric vehicles that it could not rent.
