Why the used car market may not be back to “normal”

All new cars after sale become used cars and trucks.

This is an obvious statement, but it needs to be stated to explain the root cause of the current inventory and pricing problems in the US used car market, which is a barometer of the country’s inflation rate.

During the outbreak of the coronavirus pandemic in early 2020, automakers closed factories for several weeks to stop the spread of Covid-19. It was an unprecedented move that ended up causing additional supply chain problems, such as persistent shortages of semiconductor chips, causing factories to once again shut down production for weeks, if not months, in recent years.

The lack of production meant that fewer new cars would become used models for consumers to buy, leading to limited inventory in both the new and used car markets, as well as record prices due to strong demand.

It’s been three years since the original plant closures, but American consumers, as well as the Biden administration, hoping the used car market will return to “normal” pre-pandemic levels, shouldn’t hold their breath.

The notable decline in used car prices towards the end of last year has been cut by about half in 2023 as car inventories are still significantly reduced due to disruptions in car production. There was also an uncharacteristically large number of consumers buying out rent to avoid sky-high car prices and rising interest rates.

“It looks like this will be around for some time,” said Chris Frey, senior manager of industry research at Cox Automotive. “It’s really a function of this hole in new manufacturing, creating a dynamic where wholesale or total used value is higher because there are millions fewer new cars that would end up being used.”

Cox Automotive reports that wholesale prices for used cars are up 8.8% this year. until mid March, according to the Manheim Used Car Value Index, which tracks cars sold to dealers at auctions. Prices are trending higher and the index is returning to a record of 257.7 basis points set in early 2022. In mid-March, it was 238.6.

Used car inventory dwindled 21% over last year and a whopping 26% from the pre-pandemic level of 2.8 million available cars in 2019. Cox Automotive does not expect total used car sales to return to pre-pandemic levels of about 38.2 million units until at least 2026, Frey said. .

Adding to the production pit is a change in lease. Cox reports a 20 percent increase in the number of consumers who leased their cars, buying them back instead of selling them from 2019 to 2022. The increase occurred because the residual value of the cars was in some cases much higher than expected, making it much cheaper to buy a car. than to rent another amid inflated prices and rising interest rates.

“It’s still under a lot of pressure, just like last year,” said Benjamin Preston, a motoring reporter. for consumer reports. “Prices have come down a bit…but the bottom line is they are much higher than they were before the pandemic.”

Cox Automotive previously forecast that wholesale prices in the Manheim Used Car Value Index at the end of 2023 would be down 4.3% from December 2022. The company did not revise this forecast, but it may be necessary to do so amid rising wholesale prices.

Cox reports average listed used car price was $26,068 in February, the most recent data available, up from last year’s records of over $28,000, but significantly higher than the average of about $22,000 reported two years ago. Retail prices for consumers traditionally follow wholesale prices.

So what’s the solution? There is no other way but to increase the production of new cars in order to increase the number of used models in the future. Automakers are expected to ramp up production this year, but they have also vowed not to ramp up production as they have done in the past.

“We are unlikely to return to pre-pandemic levels. Vehicles are much more expensive now,” Frey said of used car prices. “The landscape has changed. [Automakers] they don’t produce as much as they do now because they got a taste of gold – huge profits from the fact that they don’t have as many cars in production.”