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


New York
CNN

Tracking used car prices is enough to give anyone a boost.

Since the onset of the pandemic and the resulting disruptions in new car supply chains drove prices up for the first time, used car prices have posted their largest annual increase on record – in up 45% in the 12 months to June 2021, according to the Consumer Price Index – before tipping to an 8.8% 12-month decline in the latest December reading.

It was the biggest 12-month drop in used car prices since June 2009, when General Motors and Chrysler were both in bankruptcy proceedings and the economy was bleeding half a million jobs a month. .

“It was a completely wild ride,” said Ivan Drury, director of knowledge at Edmunds.com Inc., an online resource for car inventory and information.

Data from Edmunds shows the average price for a used car purchase in December was $29,533, down nearly $1,600 from the record high of $31,095 set in April 2022. The price average price of a used car today is about the same as the average price of a new car 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, have fallen 15% or higher from their early 2022 highs.

Experts say the reasons for the drop include higher interest rates that make it more expensive to finance a car purchase, limiting demand. CarMax (KMX), the nation’s largest used car dealership, 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 main reason for the drop in used car prices is the increase in the supply of new cars.

It was the lack of new car inventory that drove prices up. Parts shortages, particularly for computer chips, had stifled new-car production for much of 2022, driving the lowest level of U.S. new-car sales for the whole year since 2011.

The low supply of new cars caused the average price of used cars to rise even more, as buyers who would otherwise buy new vehicles turned to the used car market.

“At one point, it seemed like everyone who went to buy new ended up buying used,” said Greg Markus, executive vice president of AutoLenders, parent company of America’s largest car dealership chain. opportunity from New Jersey.

This included car rental companies, which before the pandemic normally purchased around 10% or more new cars per year. With a limited supply of cars for sale, automakers have essentially stopped selling low-cost fleets, and even car rental companies have been forced to turn to the used-car market.

All that has started to change in recent months. Automakers are bringing back more chips they need, and producing and selling more cars, including a return to fleet sales. Overall, sales were up 9% in the fourth quarter from a year ago, and nearly 6% from the third quarter, according to Cox Automotive. And with more buyers finding the new cars they want, that means lower demand for used cars.

Experts say part of the drop in used car prices is because the price increases were unsustainable and were partly driven by used car auction buyers paying too much for the limited supply of used vehicles.

“There was nowhere that these prices could go down, but down,” Markus said.

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

“The supply issue is still grim,” Markus said. For that reason, “I don’t think we’re going down to 2019 levels,” he added.

Soaring used car prices have been a major driver of the country’s headline inflation rate, adding about one percentage point to the overall consumer price increase from April 2021 to May 2022. C t is now a contributing factor in lowering the pace of inflation, causing the headline rate to fall by more than a third of a point in December.

This is obviously good news for those who want or need to buy a used car, although it may have a negative effect on car buyers by reducing the value of the vehicle they hope to trade in. Edmunds is showing an average trade value in December down nearly $3,000, or 11%, to $22,605, from the record high set in June 2022.

This decline in trade-in value could also be a headwind on car prices by reducing what buyers are able to afford.

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