New York (CNN) The price of used cars has fallen steadily and sharply over the past year. Unfortunately for car buyers, that could change.
Wholesale prices for used cars sold at auctions have risen sharply in recent weeks, according to industry data. Higher sales prices on used car dealer lots are likely to be hot on the heels.
According to data from Manheim, the largest wholesale car market, prices have risen 4% in the past two weeks, an unusually large increase in such a short period. While many in the industry expected the price drop to not last, the sudden increase took many by surprise.
“We didn’t expect prices to rise so much,” said Chris Frey, senior industry insights manager at Cox Automotive, owner of Manheim. “It made my eyes pop.”
Dealers began pulling back their used car inventory as prices fell late last year and into January. Much of the decline began late last year when a larger inventory of new cars became available for purchase.
A shortage of parts, especially computer chips, caused automakers to cut production well below demand for new vehicles and push potential new car buyers, even car rental companies, into the used car market. That shortage of new car inventory helped drive prices of both new and used cars to record levels last year.
But the supply of parts and stock of computer chips improved in the last half of 2022, and with it used car prices began to fall. In January, used car prices fell 11.6% from the previous year, according to the Consumer Price Index, the government’s main measure of inflation — the biggest 12-month decline since the depths of the Great Recession in early 2009.
Busy used car sales season ahead
The busy sales season for used cars is just months away – it is linked to when potential buyers get their tax refunds. Now dealers are rushing to replenish supplies, driving up prices.
The strong labor market, with employers unexpectedly adding more than 500,000 jobs in January, is also driving demand for used cars.
“If you want to pinpoint one factor driving demand for cars, it’s jobs,” said Ivan Drury, director of insights at Edmunds. “If you have a job, you have a car.”
Part of the problem in the coming months can be traced back to the early days of the pandemic three years ago. The disruptions to the new car market at the time are about to be felt by today’s used car market.
In March and April 2020, car factories across the country were shut down by stay-at-home orders and many dealerships closed. Demand for cars also fell off a cliff amid record job losses and millions of additional workers switched to working from home instead of commuting.
So the plunge in car sales in 2020 meant few people signed up for three-year leases on new vehicles, contracts that would normally now expire and which would in turn feed vehicles into the used car supply in the markets.
“The consequences of the pandemic are coming through,” said Drury. ‘The There certainly won’t be any supply.” The disruptions in the car markets in 2020 and early 2021 could affect used car prices for much of the year.
“We are entering a period of tight supply of 3 and 4 year old vehicles, which make up the majority of the [used] car sales,” said Michael Manley, CEO of AutoNation (A), the nation’s largest car dealership, in a call with investors Friday. “And that will affect wholesale prices and eventually retail prices.”
It is difficult to know how long the rise in used car prices will continue.
The labor market and consumer spending are currently strong, but there are still concerns about a potential recession. The Federal Reserve seems likely to continue raising interest rates, at least in the short term, which will in turn increase the cost of auto loans, and for the financing that auto dealers use to purchase their own stock.
The fall in used car prices has been a major factor in the slowdown in inflation, but a continued rise in used car prices could make it more difficult for the Fed to reverse interest rate hikes.
According to CPI, overall prices have risen 6.4% over the past 12 months, but that value has fallen for seven consecutive months. And prices would have risen 6.9% in the same 12-month period if used car prices had fallen so sharply and instead remained unchanged.
So broader economic conditions in the U.S. economy will certainly have an effect on used car supply, demand and prices, making predicting future prices very difficult, Frey said.
“I don’t think this latest increase is an outlier. But I would imagine prices could fall after the spring and tax refunds come in,” Frey said. But he added that forecasts are difficult to make in today’s market.
“We advocated a 4% drop in prices from December last year to December this year,” Frey said. “Maybe we should review that.”
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