The price of used cars has been falling steadily, and steeply, for much of the last year. Unfortunately for car buyers, that could be about to change.
Wholesale prices for used cars being sold at auction have risen sharply in the last few weeks, according to industry data. Higher retail prices on used car dealer lots are likely to be close behind.
According to data from Manheim, the largest wholesale automotive marketplace, prices jumped 4% in just the last two weeks, an unusually large increase in such a short time period. While many in the industry expected the drop in prices wouldn’t last, the sudden increase caught many by surprise.
“We did not anticipate that prices would jump as much as they have,” said Chris Frey, senior industry insights manager at Cox Automotive, which owns Manheim. “It made my eyes jump out.”
Dealers started pulling back on their inventory of used cars as prices were declining late last year and into January. Much of the decline began late last year as a larger supply of new cars became available for purchase.
A shortage of parts, particularly computer chips, caused automakers to scale their production back far below the demand for new vehicles, and push potential new car buyers, even rental car companies, into the used car market. That shortage of new car inventory helped drive both new and use car prices to record levels earlier last year.
But part supplies and computer chip inventory improved in the last half of 2022, and with that used car prices started to decline. In January used car prices were down 11.6% from the year earlier, according to the Consumer Price Index, the government’s key inflation reading – the biggest 12-month decline since the depths of the Great Recession in early 2009.
Busy season for used car sales ahead
The busy selling season for used cars is only months away — it’s tied to when potential buyers get their tax refunds. Now dealers are scrambling to rebuild inventories, and that is driving 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 at one factor that drives demand for cars, it’s jobs,” said Ivan Drury, director of insights at Edmunds. “If you’ve got a job, you’ve got a car.”
Part of the problem in the months ahead can be traced 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 of 2020, auto plants across the nation were shut by stay-at-home orders, and many dealerships were closed. Demand for cars also fell off a cliff amid record job losses and millions of additional workers shifted to working from home rather than commuting.
So the 2020 plunge in car sales meant that few people were signing up for three-year leases on new vehicles, contracts that would normally be coming to an end now and in turn feed those vehicles into the supply of used cars on the markets.
“The repercussions of the pandemic are coming through,” Drury said. “The supply is definitely not going to be there.” The disruptions in the car markets in 2020 and early 2021 could affect used car prices much of the year.
“We are entering a period of tight supply on 3- and 4-year-old vehicles, which make up the majority of [used] car sales,” said Michael Manley, CEO of AutoNation (AN), the nation’s largest car dealership, in a call with investors Friday. “And that’s going to impact wholesale prices and ultimately, retail prices.”
It’s tough to know how long the rise in used car prices will last.
The labor market and consumer spending is strong at the moment, but there are still worries about a possible recession. The Federal Reserve appears likely to keep raising interest rates, at least in the near term, which in turn will raise the cost of car loans, and for the financing that car dealers use when purchasing their own inventories.
The drop in used car prices has been a major factor in the slowing of inflation, but a sustained rise in used car prices could make it more difficult for the Fed to pull back on rate hikes.
Overall prices are up 6.4% over the last 12 months, according to 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 posted such a steep decline and instead just stayed unchanged.
So broader economic conditions in the US economy are certain to have an effect on supply, demand and pricing of used cars, which makes forecasting future prices very difficult, said Frey.
“I don’t think this latest increase is a blip. But I imagine prices could come down after spring and tax refunds land,” said Frey. But he added that forecasts are tough to make in the current market.
“We’ve been calling for a 4% decline in prices from December last year to December this year,” Frey said. “We may have to revise that.”