The used car price hike may soon be over
Used car prices could finally peak.
Prices soared like a rocket earlier this year, climbing 30% between March and June according to the consumer price index, the federal government’s main inflation barometer. It was by far the biggest increase in those prices in three months, according to government data dating back almost 70 years.
Before the recent rise of used car prices, which began last fall, the biggest three-month price hike was only a 12% jump in 1974.
But prices rose only 0.2% in July, and industry indicators have raised hopes that prices are at least stabilizing or even starting to decline slightly.
Another potentially positive sign for car buyers: Used car wholesale prices – what dealerships pay at auto auctions – are already falling.
“Wholesale prices appear to have peaked eight weeks ago and have since declined,” said David Paris, senior director of market intelligence at JD Power. Typically, retail prices follow wholesale prices with that kind of lag, he said. “Vehicles sold at dealerships today were purchased an average of five to six weeks ago.
But this might not immediately reduce the prices paid by customers.
In this wild car market, dealerships have depended less on wholesale purchases to fill their used car lots, purchasing an increasing number of cars directly from owners. Some dealerships are actually advertising to buy rather than sell cars, and auto calls offering to buy cars have started to annoy people on their cell phones.
In addition, the demand for used cars remains strong. This could prevent prices from dropping significantly, even if wholesale prices start to fall.
“In a situation where there is still a lot of demand, I think second-hand retail prices have the potential to hold up better than wholesale prices,” Paris said.
Used car prices can peak because they can only skyrocket so high before they become unreasonable for customers.
The gap between new and used car prices has narrowed during the recent rise in used car prices, so used car prices are likely to be near their natural highs, a said Jessica Caldwell, Executive Director of Insights at Edmunds. At some point, people who buy a car will decide to buy a new car rather than a used one, even if they have to wait for the new car they want, she said.
“It gets to the point where it just doesn’t make sense to buy used anymore,” she said. “We don’t expect prices to correct and return to 2019 levels, but we do expect them to become more normal and cool in the second half of the year.”
Used car buying typically slows down in August as tax refund checks (and stimulus checks this year) have been spent. And some people who might have bought a car in anticipation of their return to the office in September may have delayed a purchase while waiting to see when they actually do. need to come back.
Why the prices have gone up
The price increases earlier this year were driven by a number of factors. # 1 is this lesson from Day One of Econ 101: Supply and Demand. Limited stocks of products combined with strong demand put upward pressure on prices. And both of these things have happened since last fall in the used car market.
First, supply constraints: when travel almost came to a halt in the first few months of the pandemic, car rental companies, usually a major source of used car supplies, dropped a large part of their fleets in order to raise funds to survive. Despite the rebound in rental car demand, the shortage of computer chips needed to build new cars limited the supply of new vehicles they could buy, so they keep the cars now in their fleets. It has stifled supplies. In the first seven months of this year, the number of used cars sold at auction was 26% lower than in the same period of 2019, before the recession.
The limited supply of new cars has also pushed up these prices and caused some car buyers to buy used cars rather than new ones, increasing demand. And various government stimulus programs during the pandemic also put money in the pockets of potential car buyers, helping to create greater demand for new and used cars, as low interest rates keep car payments low.
But some of these factors are declining – new car production, though still limited, is picking up and stimulus checks have mostly been issued. So some of the upward pressure on prices could ease.
This doesn’t mean that it will be easy to find a cheap used car. In fact, it could be more difficult even if the average increase stabilizes.
“There aren’t a lot of cheap used vehicles on the lots anymore. These cars – the 10-year-old used car in good condition – were bought in the spring,” Caldwell said. “The vehicles available are therefore relatively new and quite expensive. It will therefore remain difficult to buy cheap used cars.”
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