New car prices are shocking. Used ones are worse. What it means for dealer stocks.

The lease is based on a purchase price of $40,000 and a “residual” value of $26,000 at delivery, which I can pay off the car if I want to. I’m so far off my mileage that I’m starting to suspect driving with Uber. This should be subtracted from the car’s actual value at the time of entry, but I see identical, high-mileage cars selling for $33,500 now. If these prices hold for a few more months, I will be “up” on my call option by 29%. They are two points more than the

S&P 500

the index is back in the same stretch.

I am no Warren Buffett vehicle. I’m actually underperforming the benchmark. The Manheim Used Vehicle Value Index is up 35% since September 2020. It started to fall at the end of last year, but is on the rise again this year. The causes have changed slightly.

Initially, car production fell amid a chip shortage and buyers turned to used vehicles for lack of other options. Bottlenecks are now easing and inventories are rising, but automakers remain cautious. The industry has become accustomed to increasing profit margins, and with financing rates much higher, the outlook for demand is unclear.

Leasing, meanwhile, has fallen out of favor: finance companies don’t want to be caught overestimating residual values ​​if used car prices fall. And many drivers with existing leases are faced with favorable math like mine, so they buy their cars instead of surrendering them. This has reduced a key source of supply for used car lots and caused dealers to raise prices at auctions. Increasingly, they compete with rental companies, which typically buy new, but manufacturers have shut down low-margin production.

Put it all together and buyers are in a tough spot. Prices for new models have risen by 21% since September 2020, according to government inflation data. This continues with my car: a new one with similar features now costs $48,000. Until recently, that price would have felt like a bit of a splurge. Last month, that was about the average new vehicle transaction price, according to Edmunds.

In a report last week, Edmunds called vehicles under $20,000 “almost extinct” and those under $25,000 “next to the line.” Only 17% of new vehicles sold last month were under $30,000, compared to 44% five years ago.

If the price cut is on the way, there’s no rush. New vehicle inventory in the United States reached 1.83 million units last month, up 73% from a year ago. But the pre-pandemic inventory exceeded approximately 3.5 million units. “We’re probably into 2024 before inventory levels fully recover,” says Stephens auto analyst Daniel Imbro.

Used car chains that cashed in during the pandemic look more humble now. When CarMax

(Ticker: KMX) reports its fiscal fourth quarter results on Tuesday, Wall Street expects it to show an 11.9% decline in same-store sales, better than last quarter’s 22.4% decline, but it’s not good. Shares are down 34% in a year. That’s 23 times forecast earnings for the next four quarters, or 18 times the four quarters after that, once conditions have become more normal.

Imbro at Stephens is not optimistic about used car chains in general. Prices could moderate in the back half of this year, but “it won’t be a precipitous drop,” he says. According to Experian, used car loan rates recently averaged 10.3% for all buyers and 7.8% for those with prime credit. Challenged affordability will continue to reduce sales volumes.

Things are looking up for new car dealers. Limited inventories have reduced the cost of showrooms, and with little need for discounts, profits per vehicle have increased. These stocks have done decidedly better in recent times, but they still trade at low price/earnings ratios. There’s a “contentious” debate about whether new car dealers are making too much money, says Imbro. He likes those with a large mix of luxury vehicles, limited exposure to manufacturers that can ramp up production too quickly and a sales footprint in economically vibrant areas. The list includes Group 1 Automotive (GPI), with forward earnings estimates of 5.6 times; Asbury Automotive Group (ABG), 6.3 times; and Penske Automotive ( PAG ), 8.6 times.

As drivers keep their cars longer, the parts and service chains can continue to thrive as well. Their good fortune is reflected in their share prices. O’Reilly Automotive ( ORLY ) trades at 22.7 times forward earnings and AutoZone ( AZO ) trades at 18.2 times.

Speaking of which, if anyone knows of a good tip for removing fry from the seat, I might be in the market soon. still deciding I’m not blown away by any of the new models’ features, but the $7,500 effective discount between my lease purchase price and the used car market might be too tempting to pass up.

On the other hand, before the recent rise in car prices, there was a 14-year stretch where prices rose only 3% overall. And that $48,000 new model is almost reasonable in Rabbit-adjusted terms: After two oil price shocks in the 1970s, my family traded in our Ford Country Squire wagon for its first new car: a 1980 Volkswagen Rabbit , which would be mine a decade later. It got 50 miles on a gallon of gas, but it was sluggish and belching, with window rollers that seemed to break two at a time.

Original price: about $14,000. Adjusted for inflation, that’s $50,000 today. There’s no hands-free power liftgate, panoramic sunroof, lane departure warning or temperature-controlled seats, if you can imagine those deprivations. Just a pop-up lighter. It’s amazing that I’m here to tell the story.

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.