The sharp drop in used car prices — what it means and what’s ahead

New York

Watching used car prices is enough to give anyone whiplash.

The onset of the pandemic and the resulting disruptions in new car supply chains have pushed prices up for the first time, with used car prices posting their biggest year-on-year increase on record in the 12 months ending June 2021 – 45% – December, according to the Consumer Price Index. before swinging to a 12-month decline of 8.8% in the latest reading for .

It was the biggest drop in used car prices in the last 12 months since June 2009, when General Motors and Chrysler were both in the process of bankruptcy and the economy was bleeding 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 inventory and car information.

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

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

Among the reasons for the decline, experts say, are high interest rates that have made it more expensive to finance car purchases, which has curbed demand. CarMax ( KMX ), the nation’s largest used car dealer, warned that a combination of high prices and high interest rates is creating affordability problems for many buyers and hurting overall demand.

But the main reason for the decrease in the price of used cars is the increase in the supply of new cars.

It was the lack of new car inventory that drove up prices. A shortage of parts, particularly for computer chips, has halted the production of new cars for most of 2022 and led to the lowest level of full-year US new car sales since 2011.

The low supply of new cars led to a larger jump in the average price of used cars as buyers who would otherwise buy new cars turned to the used car market.

“At one point, everybody who was going to buy a new car started buying a used car,” said Greg Marcus, executive vice president of AutoLenders, the parent company of New Jersey’s largest chain of used car dealerships.

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

In recent months, everything has started to change. Automakers report more supplies of the chips they need and build and sell more cars, including the return of fleet sales. Overall, sales rose 9% in the fourth quarter from a year ago and 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 part of the decline in used car prices is due to a lack of sustainability in price increases and partly to buyers at used car auctions overpaying for a limited supply of used cars.

“There was nowhere for those prices to come down,” Marcus said.

Used car prices may fall further in the coming months as new car inventories continue to build. One thing that could drive down used car prices: given that new car production has declined over the past three years, late-model used cars are likely to be scarce.

“The supply problem is still dire,” Marcus said. Therefore, “I don’t think we’re down to the level of 2019,” he said.

The increase in used car prices was the main driver of the country’s headline inflation rate, adding almost a full percentage point to the overall increase in consumer prices between April 2021 and May 2022. Now that’s a factor that helps keep prices down. the rate of inflation shaved more than a third off the overall rate 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 are looking to trade in. Edmunds puts the average trade value in December at about below. $3,000, or 11%, to a record high of $22,605 in June 2022.

This reduction in the cost of shopping can also have a negative impact on car prices by reducing what buyers can afford.

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