The sharp drop in used car prices – what it means and what lies ahead

New York

Tracking used car prices is enough to confuse anyone.

Since the start of the pandemic and disruptions to new car supply chains that have driven up prices as a result, used car prices have seen their biggest annual increase to date – up 45% in the 12 months to June 2021, according to the Consumer Price Index – before swung to a 12-month decline of 8.8% in the latest reading for December.

That was the biggest drop in used car prices in the past 12 months since June 2009, when General Motors and Chrysler were in bankruptcy proceedings and the economy was losing half a million jobs a month.

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

Data from Edmunds shows that the average used car purchase price in December was $29,533, down nearly $1,600 from the record $31,095 reached in April 2022. Today’s average used car price is about the same as the average new car price as recently as 2010 ..

While prices for late-model used cars are down just 5% from their peak according to Edmunds, the price of older used cars, those five years or older, is down 15% or more from their peaks in early 2022.

Experts say reasons for the decline include higher interest rates that make it more expensive to finance car purchases, limiting demand. CarMax ( KMKS ), the country’s largest used car retailer, has warned that the combination of high prices and high interest rates is creating an affordability problem for many buyers, hurting overall demand.

But the leading reason for the drop in used car prices is the increased supply of new cars.

A lack of new car inventory has pushed up prices. A shortage of parts, especially for computer chips, choked new car production for much of 2022, causing the lowest full-year US new car sales since 2011.

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

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

That includes rental car companies, which before the pandemic typically bought about 10% or more new cars a year. With a limited supply of cars to sell, automakers have essentially stopped selling fleets at lower prices, and even rental car companies have been forced to turn to the used car market.

All that has started to change in recent months. Automakers are reporting more stockpiles of the chips they need, and are building and selling more cars, including the return of fleet sales. Overall, sales were up 9% in the fourth quarter from a year ago and nearly 6% higher than in the third quarter, according to Cok Automotive. And with more buyers finding the new cars they want, that means less demand for used cars.

Experts say part of the decline in used car prices is that price increases have not been sustainable and has been caused in part by buyers at used car auctions overpaying for a limited supply of used vehicles.

“These prices couldn’t go anywhere but down,” Marcus said.

There could be more used car price declines in the coming months as new car inventories continue to rise. One thing that could put a floor under used car prices: Late-model used cars are likely to be in short supply given the reduced production of new cars over the past three years.

“The supply issue is still bleak,” Marcus said. Because of that, “I don’t think we’re going down to the level of 2019,” he added.

The rise in used car prices was the main driver of the country’s overall inflation rate, adding about a full percentage point to the overall increase in consumer prices from April 2021 to May 2022. It is now a factor helping to moderate the pace of inflation, reducing by more than a third of a point to the total rates in December.

This is obviously good news for those who want or need to buy a used car, although it can have a negative impact on car buyers by reducing the value of the vehicle they hope to sell. Edmunds shows the average trade-in value in December fell nearly $3,000, or 11 percent, to $22,605, from a record high in June 2022.

That drop in trade-in values ​​could also be a drag on car prices by reducing what buyers can pay.

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