The used electric car market is starting to take off as prices slowly drop

• A lot of car-buyers can't afford a new electric vehicle, but are curious about used ones.
• Today's pricey electric vehicles will one day enter the used vehicle market.
• That could play a role in the used EV market — and tax credits might not help yet.

The average cost of a new EV hit $61,448 in December, according to Kelley Blue Book — well over the $49,507 paid, on average, for a new internal-combustion engine vehicle. That's a problem for the automakers in the ever-urgent race for greater EV adoption.

Prices are coming down, but it will take time and isn't a guarantee. Much of that depends on forces outside of automakers' control, like dynamics within the battery supply chain.

A lot of would-be EV buyers are becoming more interested in the used market as a way to drive a cleaner car without such a hefty price tag.

Surveys from firm Recurrent found that just over 50% of EV shoppers in 2021 were instead interested in purchasing a used EV; a year later, that number was closer to 80%.

At first glance, today's product pipeline might not paint a good picture for the future of the used EV market. About 77% of all EV sales in the fourth-quarter commanded luxury prices, according to consultancy Anderson Economic Group. The F-150 Lightning, for instance, starts at almost $56,000. The GMC Hummer pickup will cost you about $100,000. The Cadillac Lyriq starts at nearly $63,000. Rivian's R1T has a starting cost of $73,000.

Lessons learned from the used gas-car market

If you look at the internal-combustion engine world, luxury vehicles account for about 17% of the market share, Kristin Dziczek, Federal Reserve Bank of Chicago policy advisor, said at the firm's recent auto insights symposium in Detroit.

Prioritizing these and more profitable vehicles over market share has consequences for the future used market.

"If what we've produced in the last couple of years has been a rich mix, when that goes into the used market, that keeps used prices elevated as well," Dziczek said.

The question is how the EV market will react to similar dynamics.

Electric car prices creeping downward

Consumers are seeing new EV prices start to creep down; December's number was down from the month before, in part driven by anticipation of stipulations in the Inflation Reduction Act making GM and Tesla eligible for crucial federal EV tax credits again.

Overall declines for used vehicle prices also generally apply to used EVs. The average price of a used EV, about $32,750 in December, is down about 14.4% since a peak of $38,500 last July, according to Recurrent's index of popular used EV models.

As new EV prices drop, so might their used counterparts.

"Effectively, when you bring down the new alternative, what you would imagine is that used prices for Model 3s and Bolts would come down quickly as well," said Recurrent's CEO Scott Case. "The huge Tesla price drops in new Tesla pricing that just happened last week out of the blue pretty much have a direct dollar-for-dollar impact on used Tesla prices."

What's more, "Any impact on automakers deciding to prioritize high-end EVs would not be felt for a while in the used market," Case said.

Don't count on the used EV tax credit, yet

Still, used EVs remain more expensive than used gas-cars (the average listing price for the latter was $27,143 in December, per Cox Automotive). The used EV tax credit introduced in last summer's Inflation Reduction Act could be an answer in the near-term.

Taxpayers are eligible for an up to $4,000 credit or 30% of the vehicle price, so long as the vehicle is at least two years old, under $25,000, and sold by a licensed dealership, according to the Zero Emission Transportation Association. (The taxpayer also has to meet income caps).

But a majority of used EVs don't yet comply with those criteria.

"It's looking like less than a million of these vehicles will be eligible for this tax credit this year on account of being over $25,000 when you buy them," David Gohlke, energy and environmental analyst at Argonne National Laboratory, said at the Fed symposium.

Dealers are starting to feel incentivized to drop used EVs priced close to the cap to just below it.