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

New York

Keeping up with used car prices is enough to give anyone whiplash.

Since the onset of the pandemic and ensuing disruptions in new car supply chains first pushed prices up, used car prices posted their biggest annual increase on record – a 45% increase in the 12 months ending June 2021, according to the consumer price index – before it fluctuated to a 12-month decline of 8.8% in its most recent reading for December.

That was the biggest 12-month price drop for used cars since June 2009, when General Motors and Chrysler both went bankrupt and the economy bled half a million jobs a month.

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

Data from Edmunds shows the average price of a used car purchase in December at $29,533, down nearly $1,600 from the all-time 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.

While prices of used cars of the latest model are only 5% lower than their peak, according to Edmunds, prices of older used cars, those five years old or more, are down 15% or more from their early 2022 peaks.

Experts say reasons for the decline include higher interest rates that make it more expensive to finance a car purchase, limiting demand. CarMax (KMX), the nation’s largest pure 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 increased supply of new cars.

It was the lack of new car inventory that drove up prices. A shortage of parts, particularly for computer chips, had choked new car production for much of 2022, leaving new car sales in the US at their lowest level since 2011.

The low supply of new cars caused an even bigger jump in the average used car price as buyers who would otherwise buy new vehicles 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 Markus, executive vice president of AutoLenders, the parent company of New Jersey’s largest used car dealership chain.

That included car rental companies, which normally bought about 10% or more new cars a year before the pandemic. With a limited supply of cars to sell, automakers essentially stopped selling lower-cost fleets, and even car rental companies were forced to turn to the used car market.

That has all been changing in recent months. Automakers are reporting more shipments of the chips they need and are producing and selling more cars, including a return in fleet sales. Overall, sales in the fourth quarter were up 9% compared to a year ago and almost 6% higher than in 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 decline in used car prices is that the price increases were not sustainable and were partly caused by buyers at used car auctions paying too much for the limited supply of used vehicles.

“These prices could only go down,” Markus said.

Used car prices could fall even more in the coming months as new car inventories continue to rise. One thing could put a floor under used car prices: Last-model used cars are likely to be scarce, given the reduction in new car production over the past three years.

“The supply problem is still grim,” said Markus. Therefore: “I don’t think we will reach the level of 2019,” he added.

The rise in used car prices was a major driver of the country’s overall inflation, adding about a full percentage point to the overall rise in consumer prices from April 2021 through May 2022. Now it’s a factor that helps to the rate of inflation, cutting more than a third of a point from the overall rate in December.

This is clearly good news for those who want or need to buy a used car, although it could have a negative effect on car buyers by lowering the value of the vehicle they hope to trade in. Edmunds shows that the average trade-in value has almost fallen in December. $3,000, or 11%, to $22,605, from the all-time high in June 2022.

That drop in trade-in value could also be a headwind to car prices by reducing what buyers can pay.

Leave a Comment