[From Edmunds.com] A growing number of consumers are finding themselves upside down on their car loans as the used vehicle market continues to stabilize and used values dwindle. According to the latest Edmunds Used Vehicle Report:

"A storm is brewing in the used market as incentives and inventory continue to trickle back into the new vehicle market," said Ivan Drury, Edmunds' director of insights. "With demand for near-new vehicles on the decline, used car values are depreciating similarly to the way they did before the pandemic, and negative equity is rearing its ugly head."

Edmunds analysts note that the consumers who paid above MSRP for a new vehicle during the pandemic are the most vulnerable to falling underwater on their car loans because their newer trade-ins are the most susceptible to dramatic decreases in value. According to Edmunds data, 1- and 2-year-old vehicles are experiencing the most significant drops in value compared to older used vehicles. Compared to Q3 2022 (when used vehicle values were at their peak), Edmunds data reveals:

"During the last few years, consumers could jump into new car loans and their trade-ins were shielded from negative equity because some dealers, desperate for used inventory, were willing to pay near original purchase prices," said Drury. "These days, consumers need to be more careful — especially if they're trading in newer vehicles — because near-new cars are being hit the hardest by depreciation."

Although a downturn in used values is negatively affecting a growing share of new car owners, Edmunds analysts note that there's a bright spot for car shoppers with bigger budgets. In an analysis of ATPs of 0- to 3-year-old vehicles compared to ATPs for new vehicles, Edmunds data reveals that luxury large cars offered an average discount of $48,111 — the greatest dollar savings across all vehicle segments — with new vehicles going for $118,309 compared to $70,198 for used. Large mainstream SUVs also offered a notable average discount of $19,966, with new vehicles going for $76,131 compared to $56,164 for used.

"If you want to save big on used versus new, you still have to be willing to spend big," said Joseph Yoon, Edmunds' consumer insights analyst. "Unfortunately, the most price-sensitive consumers seeking affordable transportation will have a much harder time finding discounts because the supply of older used vehicles is still pretty restricted."

Looking forward, Edmunds analysts caution that a number of factors influencing used vehicle prices will make trade-in values increasingly difficult to predict heading into 2024.

"As near-new vehicles sit on dealer lots for longer periods of time and automaker incentive programs continue to change dramatically month to month, dealers will likely be hedging their bets against value reductions as they manage their inventory," said Drury.