Dearborn, Mich. — For months, anyone who wandered the dealer lot in search of a used car could be forgiven for doing a double take — and then wanders off the lot.
Prices rose more than 40% from their levels to around $25,000 just before the viral pandemic hit. Vehicles were in short supply. And any hope of negotiating the price? good luck with him.
But now a ray of hope has come to the fore. The seemingly endless streak of skyrocketing used-vehicle prices seems to be coming to an end.
Not that one should expect a bargain. Although the average wholesale price that dealers pay is gradually falling, they will likely remain near record levels. So will the retail price for the consumers. Supply remains tight. And while demand has eased slightly, a steady influx of buyers could keep prices unusually high for a few more years.
“This is a short-term improvement,” suggested Paul Sugars, sales manager for pre-owned vehicles at Jack Demar Lincoln in Dearborn, Michigan. “Buyers are sitting on the fence, waiting to see what happens.”
Sugars should know. As internet and foot traffic at their dealerships have declined over the past few weeks, they began cutting prices on some of the 70 used vehicles in their lots. He says that now buyers have started returning.
One of them is Jessica Pitts of Detroit, who began shopping for a used vehicle last year after her car broke down. But as prices continued to rise, Pitts delayed his purchase. Recently, however, when Sugars cut the price of a red Lincoln MKC she was eyeing, Pitts took notice.
“That’s what brought it back to my attention,” she said. “The price had come down a bit.”
The red compact SUV, which has over 58,000 miles on it, costs the Pitts about $27,500, which is just a little less than $28,000.
The return of buyers like Pitts has prompted experts to suggest that demand will be high enough to prevent a sharp drop in used vehicle prices. One reason is that supply is still short. According to Cox Automotive, last month dealers had only enough vehicles to meet demand for 34 days – 11 days less than the same month in 2019, last year which was considered normal for sales of used vehicles .
Some feel that even a slight reduction in the prices of used cars initiates any slowdown or reversal in overall inflation in the economy. With the notable exception of wood prices, which initially only skyrocketed to fall back to Earth, many goods, components and services – from semiconductors and gasoline to clothing, restaurant food and household goods – have become increasingly expensive. So are labor costs, as labor shortages in many industries have prompted employers to raise wages.
Nevertheless, inflation eventually eased after the Federal Reserve, under Chair Jerome Powell, resolved the supply shortfall. Bond investors appear to agree. The yield on the benchmark 10-year Treasury note, which generally reflects an inflation outlook, has declined in recent weeks in a sign that investors are more concerned about the prospect of an economic slowdown than rising inflation.
Until the pandemic decimated the economy in March 2020 and reduced the supply of both new and used vehicles, the average wholesale used vehicle prices paid by dealers rose only slightly each year. Average prices fell briefly in April last year, reaching a peak of just over 60% in May this year, according to data kept by Mannheim, a group of auction houses where dealers buy vehicles.
Any fall, though minor, would represent a welcome relief for buyers. In June, the average retail list price of a used vehicle was less than $25,000, a record. Prices got so high that some 2 year old used vehicles were, counter-intuitively, selling for more than the sticker price when they were new.
Low-income buyers have been particularly hurt. Anyone who was forced to buy a used car to get to work was often limited to vehicles with 100,000 miles or more. Yet the average price for those vehicles also jumped 31% over the past year to $16,489 — according to Edmunds.com. Buying a car – any car – has become out of reach for many people.
There was some price increase from government stimulus payments that arrived in March, when an eligible family of four could receive $5,600. Retail prices for used vehicles rose so much that in April, May and June, they accounted for about one-third of the total increase in the US Consumer Price Index. In June, used prices rose a record 10.5%, helping push inflation to 5.4% compared to the same month a year earlier. This was the highest such increase since 2008.
By the end of June and into July, used vehicle buyers had seen enough. Many decided to wait for the madness to end, and their retreat caused a slight drop in wholesale prices. Dealers feared that they paid too much for the vehicles on their lots. Some started cutting prices.
“The frenzy is over, so inventory is starting to build up a bit,” said Michelle Krebs, an analyst at Cox Automotive. “Typically, used vehicle prices drop after tax refunds, incentive checks.”
Alex Yurchenko, senior vice president of data for Black Book, which tracks vehicle costs, expects prices to drop slightly, but expects to remain above 2019 levels for a few more years. Eventually, he suggests, prices will fall further as supply falls in line with demand.
Jonathan Smoke, chief economist at Cox Automotive, has warned against expecting a drop in used car prices before the pandemic.
“That,” he said, “will require a large drop in demand and a simultaneous expansion in supply. That’s not even likely to happen.”
The whole crazy price cycle began with the outbreak of the pandemic, when several states issued stay-at-home orders. Prices fell and automakers closed factories for eight weeks. The resulting drop in supply came as many co-consumers wanted a new or used vehicle to commute to work or to travel on the road without coming into contact with others.
While auto plants were closed in April and May last year, computer chip makers shifted production to meet wild demand for laptops, gaming devices and tablets. This created a shortage of automotive-grade chips, which remains a serious problem that may not be solved until next year.
With declining inventories and high demand for new cars, the resulting jump in new vehicle prices sent many buyers to the used market. Their demand outweighed the supply and also pushed up the prices of older vehicles.
Some new vehicle dealers have lost the best-selling models of pickup trucks and large SUVs. For some models, there are only enough vehicles on dealer lots to meet eight days of consumer demand. Manufacturers like to keep 60 days on hand to provide a good selection.
Ernie Garcia, CEO of used-vehicle upstart Carvana, said too many variables make it impossible to predict where used-vehicle prices will go from here. They could fall if chip shortages and other supply-chain bottlenecks are resolved and new vehicle prices are reduced. But they could also shoot back up in certain circumstances.
“Until we normalize the supply chain of auto manufacturers, it will be difficult to normalize car prices,” Garcia said.
Everyone who predicted auto prices over the past year, he said, “has been done wrong in very short order.”