Used Car Prices Slowing Down: Hope for Consumers?
As we've seen a significant surge in used car prices since the beginning of the year, with a record 30% increase between March and June, many are hoping for a turnaround. Fortunately, recent data points to a potential slowdown.
The impressive rise in used car prices began last fall, with the largest three-month price increase in 1974, which was a mere 12%. However, in July, the increase slowed down to a mere 0.2%. This has sparked optimism in the automotive industry, with industry experts hinting at potential price stability or even a slight decline.
One promising sign for car buyers is the drop in wholesale prices. Vehicle resellers have noticed that wholesale prices peaked about eight weeks ago and have been declining ever since. Typically, retail prices follow wholesale prices with a slight delay. David Paris, Senior Manager for Market Insights at JD Power, indicated that the vehicles sold by dealers today were probably purchased five to six weeks ago.
Although retail prices might not decrease immediately, Paris believes there's a chance that second-hand retail prices will maintain their stability better than wholesale prices.
Relax and Rejoice?
If used car prices have indeed reached their peak, it's primarily due to the sheer increase becoming unreasonable for consumers. According to Jessica Caldwell, President of Edmunds Insights, the price gap between new and used cars has been narrowing during the recent price surge. Caldwell anticipates that customers will start opting for new cars over used ones, even if they need to wait for their desired new vehicle.
"Now is the time where buying a used car makes no sense anymore," Caldwell said. "We don't expect the prices to correct and return to the 2019 level, but we expect them to normalize and become cooler in the second half of the year."
It's worth noting that the used car market historically experiences a slowdown in August as tax refund checks (and stimulus checks) run out. Some people who had planned to return to the office in September to buy a car may postpone their purchase until they actually return.
The Catalysts for Higher Prices
A range of factors contributed to the surge in used car prices in the beginning of the year, including:
- Supply and Demand: A decrease in supply and a strong demand for used cars led to an upward pressure on prices. This trend continued from late last year.
- Supply Chain Disruptions: Supply chain constraints due to the pandemic resulted in fewer new car deliveries. Car rental companies, traditionally a significant source of used car supply, had downsized their fleets in response to reduced travel due to the pandemic, exacerbating the shortage. Also, the semiconductor chip shortage impacted new car production, forcing people to look for used cars as alternatives.
- Government Stimulus Packages: Government stimulus packages during the pandemic infused money into potential car buyers' wallets, boosting demand for both new and used cars. Low-interest rates also made auto loans more affordable.
While some of these factors have started to ease, like the slow recovery in new car production, the impact on used car prices may take more time to materialize.
Navigating the Market
Even as the pace of price increases may slow, finding an affordable used car remains a challenge. Caldwell noted that the supply of affordable used cars, especially those in good condition, dried up in the spring. The remaining used cars are relatively new and relatively expensive.
"There are no more cheap used cars out there," Caldwell said. "The cars – 10-year-old cars in good condition – were sold in the spring." The remaining options are relatively new and expensive, making the search for an affordable used car more challenging.
Looking Ahead
As used car prices appear to plateau, it's unclear if they'll return to pre-pandemic levels. However, experts believe that as economic conditions improve and new car production recovers, used car prices could gradually decrease. Ultimately, the revival of the used car market depend on supply and demand dynamics, economic conditions, consumer preferences, and regulatory factors.
