Since last year, a shortage of semiconductors and supply chain constraints have severely curtailed the new car supply. This in turn has decreased the availability of used cars.
With the pandemic convincing consumers to seek personal transportation over public transit, demand for cars of all stripes has risen just as the supply diminished, pushing up prices for both. But with fewer new cars being bought, there are fewer trade-ins, driving up the prices of those that are being traded in.
“The ongoing inventory shortage has caused a broad ripple effect in market conditions. As new vehicles became more elusive, shoppers pivoted to the used-car market, pushing used-car prices up 37% in the first quarter,” said Jenni Newman, Cars.com editor-in-chief. “Eager for quality inventory, dealers are making lucrative offers for popular vehicles maintained in good condition with low mileage.”
Given the market for second-hand cars is far larger than that of new cars — in 2021, 40.9 million used cars were sold in the U.S. versus 14.95 million new cars — higher prices have a bigger impact.
Survey notes high prices for trade-ins
According to a recent Cars.com survey, 99% of dealers indicated they are paying more for trade-ins now than two years ago. Payouts have increase between 11% and 20%, according to 60% of those questioned, with 1 in 3 dealers saying their payouts have risen 20% or more from two years ago.
Consumers aren’t complaining, at least if they’re trading in their cars. Sixty-three percent of mass-market vehicle owners and 59% of luxury model owners said they received a higher than expected valuation.
According to wholesale data from dealer vehicle appraisal site Accu-Trade, the highest resale value is coming from electric or hybrid vehicles and, surprisingly, full-size vans. Also, given the current warmer weather, sports cars are seeing a pop in price.
In one month, from March to April 2022, resale prices rose 12% for the Tesla Model 3, Toyota RAV4 Prime and Kia Optima; 9% for the Tesla Model Y and Toyota Corolla; 8% for the Chevrolet Bolt EV, Kia Sportage, Honda Civic and Ford Transit; and 6% for the Dodge Charger.
Year over year, automobile auction company Manheim notes that van wholesale prices rose 24.8% in mid-June, compact car prices jumped 15%, luxury cars increased 14.1%, midsize cars 12.2% and SUVs and crossovers rose 10.7 percent. But pickup truck prices declined 1.2 percent. Overall prices are up 11.1% year over year for the first two weeks of June compared to the same period the year before.
Higher rates and prices having an impact
New car prices rose 12.5% year over year, according to the U.S. Bureau of Labor Statistics. Interest rates are also rising, with the U.S. Federal Reserve hiking interest rates by three-quarters of a percentage point last week. It’s largest rate hike since 1994. And there are indications the Federal Reserve could hike rates another 0.75 percentage points at the central bank’s next meeting in July. This would raise the interest rates for car loans, reducing consumers buying power as all vehicle prices rise.
But as new cars continue to become less affordable, and new car buyers continue to consider used cars, rising rates make new cars even less affordable they they already were, which could stoke the used car market even further, exacerbating an ongoing trend.
The average price of used cars increased 35.3% in the past year and, according to Edmunds.com, now costs more than $30,000, paid for by a 70.7-month loan (nearly six years) at 8% interest and a monthly payment of $544.
The higher prices are contributing to the current bout of inflation, with the most recent Consumer Price Index showing used car prices up 1.8% from April to May, and new vehicle prices increasing 1 percent.
But there are indications higher rates and prices are beginning to impact sales, as Manheim notes wholesale used-vehicle prices were unchanged in the first 15 days of June from May. While that doesn’t indicate prices will decline, it does indicate they could begin to level off once supply satisfies demand, although that could be months, or even years, away.
That said, Manheim reports that dealers had a 45-day supply of used cars, as well as a 25-day wholesale supply, up one day from the end of May and up five days from the same period in 2021. Whether this is the start of a trend remains to be seen. But any relief from higher prices remains a long way off.
