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The pandemic threw everything out of whack, wrecking supply chains and sending asset prices wild. That wasn’t limited to stocks, bonds and cryptocurrency, either. Consumers saw home prices explode, along with car prices, boats and seemingly everything else.
Buyers used to be able to lock in great deals on used cars, but that’s not necessarily the case anymore.
According to CNBC, used-car prices have risen 16.1% compared to a year ago. Meanwhile, new car prices are up 12.6%. Further, the average monthly car payment exceeded $700 a month in June and the average new car price surpassed $47,000 in May. Both of those numbers are highs.
Per a price analysis of used-vehicle inventory from Cars.com [NYSE:CARS] dealers, “median used-vehicle prices have been on a steady upward trajectory since the inventory shortage began, and they’ve climbed every month since January 2021 with only a brief plateau in the summer.”
Semiconductor shortages appear to be the leading cause for the chaotic car market. David Paris, Senior Manager of Market Insights at J.D. Power, says the following:
“I don’t think anyone expected the supply-chain disruptions that we experienced on the new side of the market, which ultimately sent used prices to the moon.”
We’ve already seen stocks, bonds and cryptos pull back. Will housing and car prices do the same?
Forecasts for Car Prices
Paris believes there could be a “small pullback” in car prices this summer. However, the industry will likely see an increase through the close of the year. Paris adds that production should stabilize in the back half of 2022 as supply constraints ease.
Investors and consumers are hopeful that this will lead to increased and normalized production without supply-chain related delays. If that’s the case, we could start to see car prices decline in the not-too-distant future. According to J.D. Power, “used-vehicle values will begin their descent to more normal levels by late 2022 and into 2023.”
Meanwhile, consulting firm KPMG expects a notable dip in used-car prices. They expect “used-car prices to drop 20%-30% sometime in the months after October 2022.”
Finally, Kelley Blue Book says that the second half of the year is “starting to look better” for car buyers, with inventory “slowly beginning to recover, particularly in the used market.”
On the date of publication, Bret Kenwell did not hold [either directly or indirectly] any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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Consumers may finally be getting some relief as used car prices have been dropping across all segments of the market in the U.S.
Used car prices are down 10% since this time last year, and 2% during the past month. “Luxury cars led the pack with a 13.5% year-over-year decline in prices, followed by SUVs [-12.3%], midsize cars [-10.4%], pickup trucks [-8.4%], vans [-6.3%] and compact cars [-5.4%],” according to a Yahoo report citing the Manheim Used Vehicle Value Index.
At least some of the decline in used car prices is attributable to the general cooling off of the real estate market. The assumption is that everyone is feeling less exuberant, and prudence is back in fashion.
In practical terms, for consumers in the market for a used vehicle, this isn’t a great time. While there are plenty vehicles available, a purchased vehicle is very quickly going to be worth less right after the deal is done.
Used vehicle sales pace decreases, leaving unsold inventory
The Manheim Used Vehicle Value index revealed wholesale used vehicle prices [on an adjusted basis] decreased 3% in September from August. The non-adjusted price change declined 2.1% in September, bringing it to a decrease of 2.3% year over year. September 2022 was the first month since May 2020 that wholesale values declined year over year.
“2022 has been the year of giving back some of the big 2021 increases when it comes to wholesale used-vehicle values,” said Cox Automotive Chief Economist Jonathan Smoke. “Vehicles are once again depreciating assets. As we look at the cumulative declines this year, we are down significantly and now expect to finish the year down nearly 14% in December. We haven’t seen declines like this since the onset of the pandemic and the beginning of the Great Recession.”
Based on its research, Manheim estimates used retail sales declined 8% in September from August and that used retail sales were down 10% year over year. The company attributes this to more normal used vehicle supply conditions this year.
In fact, Manheim believes the used vehicle market has been oversupplied for most of the year. Dealers built up inventory in January and February; but because of sales failing to live up to normal levels in the spring and summer, supplies have remained elevated.
Trade-ins also down
The Manheim Market Report, or MMR, values also noted drops that were bigger than average and were consistent throughout the month. The end result was a 2.5% total decline in the Three-Year-Old index during the last four weeks. MMR is a valuation tool used by dealers to assess trade-in values. This index is designed to be more stable and avoid overreacting to short-term market fluctuations.
According to Manheim, three of eight major market segments saw seasonally adjusted prices that were higher year over year in September. Compact cars had the largest increase, at 5.9%, followed by vans and pickups, both of which increased by 0.8 percent. The remaining five segments’ prices were well below the industry average, with midsize cars priced minimally lower.
Compared to August, sale prices in all eight major segments were down. Full-size cars lost more than 14 percent. Pickups and compact cars declined the least, at 1.4% and 2.6%, respectively. The remaining five segments [vans, SUVs, midsize, luxury, and sports cars] lost between 3.1% and 5.2 percent.
Down trend likely to continue
“Given that we are back to depreciation, it is more likely that the next few months will also see negative figures; however, we are not anticipating any major declines,” said Chris Frey, senior manager of economic and industry insights at Cox Automotive. “Our expectation is that depreciation over the next three months will be slower and lower than what we’ve just seen this past quarter.”
The full-year Manheim Used Vehicle Value Index forecast is now expected to finish the year down nearly 14% year over year. This change from the second quarter’s revised forecast of a 6% decline was made in recognition of the third quarter’s seeing the largest declines of 2022 and further decreases are forecast for November and December.