After a sharp drop used car prices will rise again

After a sharp drop, used car prices will rise again

New York CNN —

Used car prices have fallen steadily and sharply for much of the past year. Unfortunately, that could soon change for car buyers.

According to industry data, wholesale prices for auctioned used cars have risen sharply in recent weeks. Higher retail prices at used car dealerships are likely to follow closely behind.

According to data from Manheim, the largest wholesale auto marketplace, prices rose 4% in the last two weeks alone, an unusually large increase in such a short period of time. While many in the industry expected the price drop would not last, the sudden spike took many by surprise.

“We didn’t expect prices to go up that much,” said Chris Frey, senior industry insights manager at Cox Automotive, which owns Manheim. “My eyes opened.”

Dealers began to pull back their inventory of used cars as prices fell late last year and into January. Much of the decline began late last year when a greater supply of new cars became available for purchase.

A shortage of parts, particularly computer chips, prompted automakers to scale back production well below demand for new vehicles, pushing potential new-car buyers, even rental-car companies, into the used-car market. This lack of new car inventories helped drive prices for both new and used cars to record levels early last year.

But parts supply and computer chip inventories improved in the latter half of 2022, and with that, used car prices started falling. In January, used car prices were falling 11.6% yoy according to the CPI, the government’s main inflation gauge – the biggest 12-month fall since the depths of the Great Recession in early 2009.

The busy sales season for used cars is only months away — it is tied to when prospective buyers receive their tax refund. Now dealers are scrambling to rebuild inventories and that is driving prices higher.

The strong labor market, where employers unexpectedly added more than 500,000 jobs in January, is also driving demand for used cars.

“If you want to point to one factor driving demand for cars, it’s jobs,” said Ivan Drury, director of insights at Edmunds. “If you have a job, you have a car.”

Part of the problem for the coming months can be traced back to the beginnings of the pandemic three years ago. The upheavals in the new car market of that time will soon make themselves felt in the used car market of today.

In March and April 2020, auto factories across the country were shut down by house bans, and many dealerships were shuttered. Demand for cars also fell off a cliff amid record job losses and millions of additional workers shifted from home rather than commuting.

So the slump in car sales in 2020 meant that few people would take out three-year leases for new vehicles, contracts that would normally expire now, and these vehicles would in turn feed the supply of used cars in the markets.

“The effects of the pandemic are coming through,” said Drury. “The Replenishment will definitely not be there.” Disruptions in auto markets in 2020 and early 2021 could impact used car prices for much of the year.

“We are entering a period of tight supply of 3 and 4 year old vehicles which make up the majority [used] Car sales,” said Michael Manley, CEO of AutoNation (AN), the country’s largest car dealership, speaking to investors on Friday. “And that’s going to affect wholesale prices and ultimately retail prices.”

It is difficult to estimate how long the rise in used car prices will continue.

The labor market and consumer spending are strong at the moment, but there are still concerns about a possible recession. The Federal Reserve is likely to continue raising interest rates, at least in the short term, which in turn will increase the cost of auto loans and of financing auto dealerships to buy their own supplies.

The fall in used-car prices has been a key factor in slowing inflation, but a sustained rise in used-car prices could make it harder for the Fed to roll back rate hikes.

Overall prices are up 6.4% over the past 12 months, according to the CPI, but that figure has fallen for seven straight months. And prices would have risen 6.9% over the same 12-month period if used car prices had declined that sharply and instead simply stayed flat.

As such, broader economic conditions in the U.S. economy will certainly impact the supply, demand and prices of used cars, making predicting future prices very difficult, Frey said.

“I don’t think this recent surge is a blip. But I imagine prices could go down after spring and tax refunds would land,” Frey said. But he added that forecasts are difficult to make in the current market.

“We’ve called for a 4% price drop from December last year to December this year,” Frey said. “We may have to revise that.”