Prices for used cars may have reached a nadir.
According to the consumer price index, the federal government’s main inflation barometer, prices shot up like a rocket earlier this year, soaring 30 percent between March and June. According to government data dating back nearly 70 years, that was by far the largest three-month increase in those prices.
Prior to the recent rise in used car prices, which began last fall, the largest three-month price increase was only 12% in 1974.
However, prices only rose 0.2 percent in July, and industry indicators suggest that prices are at least leveling off, if not about to begin a modest decline.
Another potentially encouraging sign for car buyers is that wholesale prices for used cars, which are what dealers pay at auto auctions, are already declining.
“Wholesale prices look like they peaked eight weeks ago, and have been moving down since then,” said David Paris, senior manager of market insight for JD Power. Typically retail prices follow wholesale prices with that kind of time lag, he said. “The vehicles being sold at dealerships today were acquired on average five to six weeks ago.”
However, this may not result in immediate price reductions for customers.
Dealers have relied less on wholesale purchases to fill their used car lots in this wild car market, instead purchasing an increasing number of cars directly from owners. Some dealers are promoting the purchase of cars rather than the sale of cars, and robocalls offering to buy cars have begun to annoy people on their phones.
In addition, there is still a high demand for used cars. Even if wholesale prices begin to fall, this could prevent prices from falling dramatically.
“In a situation where there is still lot of demand, I think used retail prices have the potential to hold up better than wholesale,” said Paris.
Used car prices may have reached their apex, as they can only rise so far before becoming unreasonably high for customers.
According to Jessica Caldwell, executive director of Edmunds’ insights, the gap between new and used car prices narrowed during the recent run-up in used car prices, indicating that used car prices are likely approaching their natural ceiling. People who are looking for a car will eventually decide to buy new rather than used, even if it means waiting for the car they want, she said.
“It comes to the point where it just doesn’t make sense to buy used,” she said. “We don’t expect the prices to correct and go back to 2019 levels, but we expect them to become more normal and cool off in the second half of the year.”
In August, used car sales typically slow as tax refund checks (and stimulus checks this year) are spent. And some people who were looking for a car in anticipation of returning to work in September may have postponed their purchase while they wait to see when they will need to return.
A number of factors contributed to the price hikes earlier this year. The first is the supply and demand lesson from the first day of Econ 101. Product inventories are limited, and demand is high, putting upward price pressure on the market. And both of these things have happened in the used car market since last fall.
First and foremost, there are supply constraints: When travel came to a halt in the early months of the pandemic, car rental companies, which are typically a major source of used cars, sold off much of their fleets to raise cash to stay afloat. Despite a rebound in rental car demand, a shortage of computer chips required to build new cars has limited the supply of new vehicles they can purchase, so they are clinging to the vehicles they already have. This has caused a shortage of supplies. The number of used cars sold at auction in the first seven months of this year was 26% lower than in the same period last year, before the recession.