Sharp drop in used car prices — what it means and what awaits us

New York

Tracking used car prices is enough to intimidate anyone.

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

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

“It’s been an absolutely wild ride,” said Ivan Drury, director of insights at Inc., an online source 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 high of $31,095 reached in April 2022. Today’s average used car price is about the same as the average new car price since 2010. .

While prices for late-model used cars are down just 5% from their peak according to Edmunds, prices for older used cars, those five years or older, are 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 ( KMX ), the nation’s largest used car dealer, warned that the combination of high prices and high interest rates is creating an affordability problem for many buyers, hurting overall demand.

However, the main reason for the drop in used car prices is the increased supply of new cars.

Prices have risen due to the lack of new cars. A shortage of parts, especially for computer chips, choked new car production for much of 2022, causing US new car sales to hit their lowest full-year level since 2011.

The weak supply of new cars caused the average price of used cars to jump even more 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 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 for sale, 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 started to change in recent months. Automakers are reporting increased supplies of the chips they need and are making and selling more cars, including a return to fleet sales. Overall, sales were up 9% in the fourth quarter compared to last year and nearly 6% higher than in 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 part of the decline in used car prices is that price increases have not been sustainable and has been driven in part by buyers at used car auctions overpaying for a limited supply of used vehicles.

“Prices had nowhere to go but down,” Markus said.

The coming months could see used car prices fall even more, as new car inventories continue to increase. One thing that could lower 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 problem is still difficult,” Markus said. Because of this, “I don’t think we will go down to the levels 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 overall consumer price increases from April 2021 to May 2022. It is now a factor helping to lower the pace of inflation, wiping more than a third of a point from 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 effect on car buyers by reducing the value of the vehicle they are hoping to trade in. Edmunds shows the average trade-in value in December fell nearly $3,000, or 11%, to $22,605, from June 2022’s record high.

That drop in trade-in value could also be a drag on car prices by reducing the amount buyers can pay.

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