The current state of the used car industry – what goes up must come down

Over the past year, the auto industry has seen massive growth in new and used car sales, with the latter seeing some of the highest prices in history.

However, the tide may be turning. Some recent events in the auto industry may indicate that used car sales are not as strong as last year. What are the indicators and why is this change happening? Check out these takeaways from the used car sales industry.

Used car prices fall, so does demand

According to Cox Automotive’s Manheim Used Vehicle Value Index, used car prices fell 1% between March and April 2022. This is now the third consecutive month of falling prices since the start of this year. In addition, wholesale prices have have fallen 6.4% since January, but are still up 14% than at the same time last year.

The fall is not only related to prices, because sales have fell 13% between March and April. The culprit could be the significant impact of rising inflation. Consumers have to pay more for goods and items in various industries, which means they may not have the funds for a still very expensive used vehicle. Prolonged price compression could continue to reduce demand and prices.

Auto retailers see slowing used car market

Further evidence of this used-car market cooling has emerged from auto retailers like AutoNation and CarMax. AutoNation saw its used car sales increase by 47%, but its profit margins fell by 10%. Recently, analysts were concerned on the company’s slowing profit margins and erratic first quarter.

Additionally, CarMax’s used vehicle woes began in 2021. In the fourth quarter of last year, the company experienced a 6.5% drop in open store used car sales 13 months. Bill Nash, CEO of CarMax, discussed some of the reasons why the current drop in sales might be happening, saying, “From an affordability perspective, you have interest rates going up, inflation, you have the Ukraine-Russia war. The [is] just a lot weighing on the consumer right now.

Carvana took a hit

In addition to third-party car retailers and dealerships, Carvana has also seen a drop in demand for used cars. Although she recorded an increase in her income, she experienced a 7% decrease used vehicles sold compared to the same period last year, which represents a drop of almost 8,000 units compared to the 105,185 units of used cars sold in 2021.

Although this may be partly due to logistical challenges and backlogs, external factors beyond Carvana’s control are also contributing to the slowdown, namely rising interest rates and inflation. This volatility led to the sale of Carvana shares 85% below its August 2021 peak of $377 per share.

A return to normal?

Over the past two years, this sharp decline in automotive supply and the resulting increase in demand has been due to a slow supply chain, a factor that will likely correct itself in the near future.

So what does that future look like? Even in these uncertain times, it’s highly likely that used car prices and sales could return to pre-pandemic levels, a re-emergence of normal times.

Charlie Chesbrough, senior economist at Cox Automotive, mentioned it best: “The anniversary of the chip shortage – when prices started to skyrocket – is approaching. Year-over-year growth rates will come down to earth. However, the prices will not turn negative. Instead, they should return to more normal growth patterns, but from a higher base.

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