Used car prices have fallen steadily and sharply for much of the past year. Unfortunately for car buyers, that might be about to change.
Wholesale prices for used cars sold at auction have risen sharply in recent weeks, according to industry data. Higher retail prices at used car dealer lots will likely follow closely.
According to data from Manheim, the largest automotive wholesale market, prices have jumped 4% in the past two weeks alone, an unusually large increase in such a short time. While many industry players expected the price drop to not last, the sudden increase came as a surprise to many.
“We didn’t expect prices to rise as much as they have,” said Chris Frey, senior industry intelligence manager at Cox Automotive, owner of Manheim. “It blew my eyes out.”
Dealerships began to reduce their used car inventory as prices fell late last year and into January. Much of the decline began late last year as a greater supply of new cars became available for purchase.
A shortage of parts, especially computer chips, has caused automakers to cut production well below demand for new vehicles and push potential new car buyers, even car rental companies, into the market. used cars. This shortage of new car inventory helped drive new and used car prices to record highs early last year.
But parts supplies and computer chip inventories have improved in the latter half of 2022, and with that, used car prices have started to decline. In January, used car prices fell 11.6% from a year earlier, according to the Consumer Price Index, the government’s main reading of inflation – the biggest 12-month drop since the depths of the Great Recession in early 2009 .
Busy selling season for used cars is just a few months away — that’s tied to when potential buyers get their tax refund. Now dealers are scrambling to replenish inventory, driving up prices.
The strength of the labor market, with more than 500,000 jobs unexpectedly created by employers in January, is also boosting demand for used cars.
“If you want to point to one factor driving demand for cars, it’s jobs,” said Edmunds chief insight officer Ivan Drury. “If you have a job, you have a car.”
Part of the problem for the coming months goes back to the early days of the pandemic three years ago. The disruptions in the new car market at that time are about to be felt in today’s used car market.
In March and April 2020, auto factories across the country were shut down by stay-at-home orders, and many dealerships were closed. Demand for cars also fell off a cliff amid record job losses and millions more workers switched to working from home rather than commuting..
So the slump in car sales in 2020 meant few people were signing three-year leases on new vehicles, contracts that would normally come to an end now and in turn feed those vehicles into the car supply. opportunity in the markets.
“The repercussions of the pandemic are coming through,” Drury said. “THE the supply will definitely not be there. Disruptions in auto markets in 2020 and early 2021 could affect used car prices for much of the year.
“We are entering a period of shortages of 3- and 4-year-old vehicles, which account for the majority of (used) car sales,” said Michael Manley, CEO of AutoNation (AN), the country’s largest car dealership. country. during a call with investors on Friday. “And that’s going to impact wholesale pricing and ultimately retail pricing.”
It is unclear how long the rise in used car prices will last.
The labor market and consumer spending are strong at the moment, but there are still fears of a possible recession. The Federal Reserve looks likely to continue raising interest rates, at least in the short term, which will in turn increase the cost of auto loans and the financing auto dealers use to buy their own inventory.
Falling used-car prices have been a major factor in slowing inflation, but a sustained rise in used-car prices could make it harder for the Fed to back out of rate hikes.
Overall prices are up 6.4% over the past 12 months, according to the CPI, but that reading has fallen for seven straight months. And prices would have risen 6.9% over the same 12-month period if used car prices had shown such a steep decline and remained unchanged.
So broader economic conditions in the U.S. economy are sure to have an effect on used car supply, demand and prices, making it very difficult to predict future prices, Frey said.
“I don’t think this latest increase is a blow. But I imagine prices might come down after the spring and tax refunds would land,” Frey said. But he added that predictions are hard to make in today’s market.
“We called for a 4% drop in prices from December last year to December this year,” Frey said. “We may have to revise that.”