The used car price bubble is about to burst

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Soaring used vehicle prices are set for a correction, according to CarMax CEO William Nash.

Conditions caused by COVID-19 have pushed up average used car prices by a few thousand dollars and, in some cases, above their original prices.

Used car prices for newer models “are skyrocketing relative to new car prices,” Nash said during CarMax’s first quarter earnings call on Friday. “I think we’re getting closer to that inflection point.”

USED ​​CAR PRICES HAVE RECORDED ON THE GROS MANHEIM INDEX

Used car and truck prices in May jumped 30% a year, spurred by a global shortage of chips that are pushing more customers into used vehicles and pent-up demand from consumers, many of whom were overdue. money to spend thanks to the government’s stimulus measures.

Car rental companies, which are usually sellers of used vehicles, have become buyers because of their need to restock fleets that have been sold to raise funds during the early days of the pandemic.

Nash said the current environment of higher used car prices would generally be headwinds for the industry. However, the shortage of new cars drove up demand and prices and fattened his company’s bottom line.

A moderation in the price of used vehicles would surely be welcomed by the Federal Reserve, which has been repelled by its story that the recent inflation that is making its way into the US economy is “transient.”

The 7.3% month-over-month jump in used vehicle prices in May accounted for a third of the total increase in core inflation. Used vehicle prices jumped 10% in April.

Federal Reserve Chairman Jerome Powell at a June 16 press conference attributed the surge in used vehicle prices to “a perfect storm of very high demand and limited supply.”

He added that he was “not sure” when the prices would start to reverse.

Nash expects prices to moderate as the effects of government stimulus controls wear off. There is already evidence happening. Personal spending was flat in May, slowing from a peak of 5% growth two months earlier.

Nash says the supply chain constraints surrounding new cars will not be corrected until “the latter part of this year.”

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In the meantime, used vehicle dealers are expected to continue to profit from the market disruptions caused by COVID-19.

CarMax reported record earnings and revenue in its first fiscal quarter on Friday.

Sales increased 138% from a year ago to $ 7.7 billion. Diluted net earnings per share of $ 2.63 was 65% above last year’s record in the first quarter.

CarMax shares are up 35% this year through Friday compared to the S&P 500’s 14% gain.


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