A sharp drop in used car prices — what it means and what lies ahead

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Tracking down used car prices is enough to make you want to slap your neck. As prices soared for the first time since the start of the pandemic and disruptions to new car supply chains, used car prices posted their biggest annual rise in history – up 45% in the 12 months ending June 2021, according to the Consumer Price Index, before falling to 12- a monthly drop of 8.8% in the latest readings for December. It was the biggest 12-month drop in used car prices since June 2009, when General Motors and Chrysler were in bankruptcy and the economy was losing half a million jobs a month. “It’s been an absolutely wild ride,” said Ivan Drury, director of information resources for Edmunds.com Inc., an online inventory resource. and vehicle information. Edmunds data shows the average used car purchase price in December was $29,533, nearly $1,600 below the record high of $31,095 set in April 2022. Today’s average used car price is about the same as the average new car price just in 2010. While prices for late-model used cars are down just 5% from their peak, prices for older used cars five years and older are down 15% or more from their peaks in 2022, according to Edmunds. Experts say the reason for the decline is higher interest rates, which make it more expensive to finance a car purchase, which limits demand. CarMax, the nation’s largest used car dealer, warns that the combination of high prices and high interest rates is creating an affordability problem for many buyers, hurting overall demand. Increased inventory lowers prices, but the main reason used car prices are falling is the increased supply of new cars. The lack of new cars has led to higher prices. A shortage of parts, especially for computer chips, has halted new car production for much of 2022, leading to the lowest level of new car sales in the US for a full year since 2011. The low supply of new cars caused the average price of used cars to jump even more as buyers who would otherwise have bought new cars turned to the used car market. “At one point it seemed like everybody who was going to buy new ended up buying used,” said Greg Marcus, executive vice president of AutoLenders, parent company of New Jersey’s largest used car chain. This included car rental companies, which before the pandemic typically bought about 10% or more new cars a year. With a limited supply of cars for sale, automakers have essentially stopped selling their fleet at a lower price, and even rental car companies have been forced to turn to the used car market. All this has started to change in recent months. Automakers are reporting increased supplies of the chips they need, and are building and selling more cars, including renewed fleet sales. Overall, sales were up 9% in the fourth quarter from a year ago and up nearly 6% from the third quarter, according to Cox Automotive. And with more buyers finding the new cars they want, that means less demand for used cars. Experts say the decline in used car prices is partly because price growth has not been sustainable and has been partly caused by buyers at used car auctions overpaying for their limited supply of used cars. “These prices had nowhere to go but down,” Marcus said. Used car prices could fall further in the coming months as new car inventories continue to build. One thing that could limit used car prices is that late-model used cars are likely to be in short supply given the decline in new car production over the past three years. “The supply problem is still bleak,” Marcus said. Because of that, “I don’t think we’ll go down to 2019 levels,” he added. Rising used car prices have been a major driver of the country’s overall inflation rate, adding about a full percentage point to inflation. the overall increase in consumer prices from April 2021 to May 2022. It is now a factor helping to lower the rate of inflation, cutting more than a third of a point from the overall level in December. This is obviously good news for those who want or need to buy a used car, although it can have a negative effect on car buyers by reducing the value of the car they are hoping to trade in. Edmunds shows that the average exchange value in December fell nearly $3,000, or 11%, to $22,605, from a record high reached in June 2022. This drop in the value of trade-ins can also be a headwind for car prices due to a reduction in what buyers can pay.

Tracking used car prices is enough to blow anyone’s mind.

For the first time since the start of the pandemic and related supply chain disruptions, new car prices have skyrocketed. used car prices posted their biggest annual growth on record, rising 45% in the 12 months ending June 2021, according to the consumer price index, before easing to a 12-month drop of 8.8% in the latest reading for December.

It was the biggest drop in used car prices in 12 months since June 2009, when General Motors and Chrysler were in bankruptcy litigation and economics bleeding a half a million jobs per month.

“It’s been an absolutely wild ride,” said Ivan Drury, director of information research at Edmunds.com Inc., an online resource for auto inventory and information.

Edmunds data shows the average used car purchase price in December was $29,533, nearly $1,600 below the record high of $31,095 set in April 2022. The average price of a used car today is about the same as the average price of a new car in 2010. .

According to Edmunds, while prices for late-model used cars are down just 5% from their peak, prices for older used cars five years and older are down 15% or more from their peak in early 2022.

Experts talk about the reasons for the decline higher interest rates making it more expensive to finance a car purchase, limiting demand. CarMax, the nation’s largest used car dealer, has warned that the combination of high prices and high interest rates is creating availability problem for many buyers, which hurts overall demand.

Increased inventory lowers prices

But the main reason for the drop in used car prices is the increase in the supply of new cars.

The lack of new cars has caused prices to rise. Shortage of spare parts, especially for computer microcircuitshalted production of new cars for most of 2022, leading to the lowest level of new cars in the US for the entire year sales since 2011.

The low supply of new cars caused the average price of used cars to jump even more as buyers who would otherwise have bought new cars turned to the used car market.

“At one point, it seemed like everyone who was going to buy new ended up buying used,” said Greg Marcus, executive vice president of AutoLenders, the parent company of New Jersey’s largest used car chain.

This included car rental companies that were operating before the pandemic usually buy about 10% or more new cars per year. With a limited supply of cars to sell, automakers have essentially stopped selling their fleet at a lower price, and even rental car companies have been forced to turn to the used car market.

All this has started to change in recent months. Automakers are reporting increased supplies of the chips they need, and are building and selling more cars, including renewed fleet sales. Overall, sales were up 9% in the fourth quarter from a year ago and up nearly 6% from the third quarter, according to Cox Automotive. And as more buyers find the new cars they want, that means less demand for used cars.

Experts say the drop in used car prices is partly because price increases have not been sustainable and has been partly caused by buyers at used car auctions overpaying for a limited supply of used cars.

“These prices had nowhere to go but down,” Marcus said.

Used car prices could drop further in the coming months as new car inventories rise. One thing that could limit used car prices is that late-model used cars are likely to be in short supply given the decline in new car production over the past three years.

“The supply picture is still bleak,” Marcus said. Because of that, “I don’t think we’ll go down to 2019 levels,” he added.

Rising used car prices were the main driver of the country’s overall inflation rate, adding about a full percentage point to overall consumer price growth between April 2021 and May 2022. It is now a factor helping to lower the rate of inflation, reducing by more than a third of a point from the overall level in December.

Obviously, this is good news for those who want or need to buy a used car, although it can have a negative effect on car buyers by reducing the value of the car they’re hoping to trade-in. Edmunds shows that the average exchange value in December fell almost $3,000, or 11%, to $22,605, compared to June 2022’s record high.

Such a drop in trade-in value can also be a headwind for car prices due to a reduction in what buyers can pay.

A sharp drop in used car prices — what it means and what lies ahead

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