Used car prices are falling, but ‘seller’s market’ likely to last for years
- Federal inflation data shows U.S. used car prices have dropped since fall
- That follows a year of peak pricing that’s shocked consumers
- But the used vehicle pipeline is unlikely to fill in the next few years, keeping demand and prices higher than before the pandemic
DETROIT — A dip in used car prices is helping to push inflation lower — however slightly — but longer-term sales shifts and higher interest rates mean that today’s decline won’t offset a tough resale market for car buyers.
Inflation data released Thursday show used U.S. vehicle prices continue to fall from their peak in late 2021 and early 2022 when they approached $30,000. Prices declined 2.5 percent in December, with the average vehicle price reaching about $27,000 at year-end.
However, the supply of used vehicles will likely remain tight for years, industry experts said this week at the Automotive Insights Symposium presented in Detroit by the Federal Reserve Bank of Chicago.
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Lingering pandemic supply shortages that cut production, automaker shifts to electric vehicles along with financing trends all will keep the number of available used vehicles well below market demand — and prices are likely to remain high, industry experts said.
“It’s been a crazy time,” Charlie Chesbrough of Cox Automotive, a national used vehicle marketer based in Atlanta, said Wednesday. “The high price increases that we saw over the last couple of years have really shaken consumers.”
Overall U.S. inflation took a baby step back in December, declining 0.1 percent for the second straight month, according to data released Thursday by the U.S. Bureau of Labor Statistics. Food prices continue to increase 0.3 percent, while energy — including gas prices — declined last month.
The newest data means that 2022 ended with an annualized rate of inflation of 6.5 percent.
Used car prices reflect one of the bigger non-energy declines in December, and over the full year dropped 8.8 percent, according to the federal data.
But supply — and affordability — remain issues, and that starts with availability of new vehicles.
By the end of 2022, annual light vehicle production in the U.S. was still under 15 million units per year, an increase of about 1.5 million from a year earlier, replenishing the dealer lots that were empty in 2021, but still well below the 17.1 million vehicles produce in 2019, before the pandemic hit.
Yet some manufacturers, like Toyota and Honda, still only have a few days’ supply of vehicles available for buyers, compared to a month’s worth of inventory in a typical market, said Peter DeLongchamps, senior vice president of Houston-based Group 1 Automotive [NYSE: GPI], which operates 149 dealerships in the U.S., during the conference. “(They have) a long way to go to catch up.”
Pandemic-related disruptions kept at least six million vehicles out of the retail cycle over the past three years, “which will affect the used car business,” DeLongschamps said.
While many economists are watching for vehicle production to continue to climb, a possible recession this year could curtail that. Automakers also have an incentive to keep production levels lower: They’re making more money at the lower production levels, which keep demand high — and allows them to sell higher-priced vehicles.
That means fewer vehicles will be available for resale for the next several years.
Other factors affecting the used vehicle market include the fact that Americans are keeping their cars longer, with the average age of a light vehicle in the U.S. now 12.2 years, compared to 9.6 years in 2002; and the drop in auto leases to fewer than one in five transactions.
Even among existing auto leases, fewer people are turning them into dealers at the end of the term, Chesbrough said, which in turn limits how many vehicles are available to dealers for resale.
“A huge portion (of people who leased a) vehicle ended up buying it because it appreciated so much,” he said, describing the increase in value. Some people then sold the cars directly to buyers, rather than going through dealers, or continued driving it instead of buying a new one.
Meanwhile, interest rates on auto loans have effectively doubled over the past year, said Lonnie Smith, CEO of On the Road Lending, a Texas nonprofit that finds loans for lower-income workers so that they can afford auto transportation.
The same car may cost thousands of dollars more today than in 2020 — and interest payments may cost twice as much, as people with moderate credit face 9 and 10 percent loans.
The Federal Reserve raised the bank-to-bank lending rate seven times in 2022 — prompting increases in consumer lending rates. The Fed is expected to consider more adjustments in 2023. Either way, officials at The Fed have said no rate cuts are expected this year as the nation’s monetary policy moves to try to get inflation back down to about 2 percent per year.
This makes the market particularly tough for low- and moderate income buyers seeking to buy vehicles. Industry data shows that some used car prices are up on average 36 percent over the last three years, said Smith, and the average used car monthly loan payment was $550 in November. The high prices also have implications for job seekers.
On job applications, many people are asked if they have access to reliable transportation, Smith said. Without a car or access to mass transit, employers are reluctant to hire for some jobs.
“This is a significant barrier for people either being able to obtain a quality job,” Smith said, “and then being able to maintain that quality job.”
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