New York (CNN) The price of used cars has been falling steadily and sharply for much of the last year. Unfortunately for car buyers, that could be about to change.
According to industry data, wholesale prices for used cars sold at auction have risen sharply in recent weeks. Higher retail prices on used car dealership lots are likely just around the corner.
According to data from Manheim, the wholesale car market, prices rose by 4% in the past two weeks alone, an unusually large increase in such a short period of time. While many in the industry had hoped that the drop in prices would not last, the sudden increase caught many by surprise.
“We didn’t anticipate that prices would rise as much as they have,” said Chris Frey, senior director of industry information for Cox Automotive, which owns Manheim. “It made my eyes pop.”
Dealerships began reducing their used car inventory as prices fell late last year and into January. Much of the decline began late last year when a larger supply of new cars became available for purchase.
Shortages of parts, especially computer chips, caused automakers to scale back production well below demand for new vehicles and pushed potential new car buyers, even rental companies, in the used car market. That dearth of new car inventory helped push new and used car prices to record levels early last year.
But parts supplies and computer chip inventory improved in the latter half of 2022, and with that, used car prices began to fall. In January, used car prices fell 11.6% from a year earlier, according to the consumer price index, the government’s key inflation reading: the biggest drop in 12 months since the depths of the Great Recession in early 2009.
Busy season for the sale of used cars
The busy sales season for used cars it’s only a few months away, that’s right tied to when potential buyers receive their tax refunds. Now dealers are scrambling to rebuild inventories, pushing up prices.
The strong labor market, with employers unexpectedly adding 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, chief information officer at Edmunds. “If you have a job, you have a car.”
Part of the problem in the coming months can be traced back to the early days of the pandemic three years ago. The disruptions to the new car market at that time are about to be felt by today’s used car market.
In March and April 2020, auto plants across the country were shut down by stay-at-home orders and many dealerships closed. Demand for autos also fell off a cliff amid record job losses and millions of additional workers working from home instead of commuting to work..
So the drop in 2020 auto sales meant that few people signed up for three-year leases on new vehicles, contracts that would normally end now, and in turn fed those vehicles into the car supply used in markets.
“The repercussions of the pandemic are coming through,” said Drury. “The The supply definitely won’t be there.” Disruptions in the auto markets in 2020 and early 2021 could affect used car prices for much of the year.
“We are entering a period of reduced supply of 3- and 4-year vehicles, which make up the majority of [used] car sales,” said Michael Manley, CEO of AutoNation (AN), the nation’s largest auto dealer, on a call with investors on Friday. “And that will affect wholesale prices and ultimately retail prices.”
It is difficult to know how long the increase in used car prices will last.
The job market and consumer spending are strong right now, but there are still concerns about a potential recession. It seems likely that the Federal Reserve will continue to raise interest rates, at least in the short term, which in turn will increase the cost of auto loans and the financing that car dealers use to purchase their vehicles. own inventories.
Falling used car prices have been a big factor in slowing inflation, but a sustained rise in used car prices could make it harder for the Fed to pull back rate hikes.
Global prices have risen by 6.4% over the past 12 months, according to the CPI, but this reading has fallen for seven consecutive months. And prices would have increased by 6.9% over the same 12-month period if used car prices had fallen as steeply and instead remained unchanged.
So the broader economic conditions of the US economy will certainly have an effect on the supply, demand and prices of used cars, making it very difficult to forecast future prices, Frey said.
“I don’t think this latest increase is a mistake. But I imagine prices could go down after the spring and the tax refunds come in,” Frey said. But he added that predictions are difficult to make in today’s market.
“We’ve been asking for a 4% drop in prices from December of last year to December of this year,” Frey said. “Maybe we should revisit that.”
