It’s getting weird in the used car arena. Just as things seemed to be settling down, in comes January with a surprise spike in wholesale values. The Manheim Index, America’s largest index of used car wholesale prices, is up, but I have a feeling that spike isn’t here to stay.
Used car wholesale values climbed in January by an unadjusted 1.5 percent over December. Adjusted for seasonal variance, they’re the highest they’ve been in five months. In real terms, used cars grew more expensive over the past month. Well, most used cars. As Cox Automotive puts it, “Compared to December, six of the eight major segments’ performances were up between 0.8% and 3.6%, with pickups having the strongest showing. Only full-size and luxury cars were down compared to December.” Sounds like it was a great month to buy a boat, but not a great month to buy a subcompact. But why are car prices up now? As ever, the answer is a bit complicated.
For starters, there’s buyer confidence. According to Cox Automotive, retail sales are up 16 percent compared to December, which means that more drivers are jumping into the marketplace. This shouldn’t be surprising as plenty of car owners sat things out during peak silliness. Many, many people held onto their junkers for dear life, and some are just now needing to break down and finally buy replacement cars. Then there’s the subset of car buyers who’ve found stability in the new normal. Even though prices aren’t back to normal, they’re cheaper than at peak silliness and an affordable, reliable used car should last a long time.
Then there’s the matter of supply. We’re entering a multi-year period where three-year-old off-lease vehicles will be scarce. Those who leased slightly before the pandemic would be wise to buy out their leases as new vehicle leasing sucks right now. In addition, the new car supply crunch we’ve seen over the past few years will compound these issues in the next few months.
On Feb. 1, the Federal Reserve raised its key interest rate by 0.25 percent, which should translate into more expensive car loans. In addition, new car production is recovering at a rapid rate. Bloomberg reports that Toyota plans on making 10.6 million new cars this year, a full bounce-back to pre-pandemic levels. As more new cars come onto the market in a period of elevated interest rates, some people who pre-ordered will back out, which could lead to a faster clearing of order backlog or even oversupply.
Once oversupply happens, it just takes one volume automaker building desirable cars to blink and incentives will be back on the table. The key is desirable cars, as even though Alfa Romeo Giulias are sitting around on dealer lots with substantial discounts, you don’t suddenly see them becoming popular. Anyway, if there are more new cars available with either cash on their hoods or incentivized finance rates, more people should buy new, leading more used cars entering the marketplace. More used cars usually means cheaper used cars, unless a particular model has entered the Porsche 911 zone of absurd valuations.
Of course, there are a few scenarios that could fuck this whole thing up. Electric cars may stay expensive for the most part, pushing new cars out of reach for the sort of people who buy new Corollas and putting more pressure on the used market. A new pandemic could be caused by H5N1 flu breaching the avian realm and infecting humans. However, the chances of such an interruption are small compared to the likelihood of things slowly getting cheaper.
The eventual used car price decline likely won’t be a crash, but instead a slog. Unlike the meteoric rise to the top, there will be ups and downs. As it stands, we’ll have to wait and see if January’s rally carries. While tax return season will likely see a slight rise in used car prices, we’ll have a much better picture of used car pricing trends by May. Plus, experts think that used car prices will decline in 2023, so don’t lose hope.
(Lead photo credit: “Car Dealership on Western Ave” by David Hilowitz is licensed under CC BY 2.0.)
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There’s my fix of “Row of Cars at a Car Dealership” today!
Trade in values on my ’21 Wrangler Rubicon diesel are up about $1k over last month (according to KBB at least), which is still down >$9k ~6 months ago.
Looked up a new build this afternoon and ran some numbers. It would cost me an extra $7520 for the same build (except I can’t order a diesel JL anymore, but assuming JT diesel upgrade cost), pre-tax.
On top of that, the interest over a 60-month loan would be nearly triple what I’m paying now, for another >$8k increase!
I’ve been watching the used market closely since I have a five year old, low mileage Subaru (that eats CVTs) to unload. From my perspective, the market overcorrected down on used vehicle wholesale prices. I expected either a small rebound or a prolonged plateau.
There is an $11,500 range between the lowest trade-in offer and highest retail price for my car. There is also a $6,500 range for trade-in values. This market still doesn’t know what it’s doing so shop around carefully.
Like a lot of people, we’ve held off buying something used during this spike (new cars are just too frickin much), and you’ve nailed it for a lot of us, we can’t hold out much longer for sanity in prices. Please car gods, help us! I’ll burn a junker hammered into what deity image shape is needed if it will help rain fair used car prices.
C’mon price crash!! Daddy’s gotta buy another car for the wife because a kid going off to college is taking hers!!
Good stuff as always Thomas.
I expect the market to revert to the old days (pre 2020) levels very soon.
People are exhausted, money is tight, and life is short. The shit show has to end eventually.