After a sharp decline, used car prices are poised to rise again

New York (CNN) Used car prices have been falling steadily and sharply for most of the past year. Unfortunately for car buyers, that could change.

Wholesale prices for used cars sold at auction have risen sharply in the past few weeks, according to industry data. Higher used car dealer retail prices are likely to be close behind.

According to data from Manheim, the largest auto wholesale market, prices have jumped 4% in the past two weeks alone, an unusually large increase in such a short period of time. Although many in the industry expected the price drop to not continue, the sudden increase surprised many.

“We didn’t expect prices to jump as much as they did,” said Chris Frey, senior manager of industry insights at Cox Automotive, which owns Manheim. “That made my eyes pop.”

Dealers began pulling their used car inventory as prices fell late last year and into January. Much of the decline began late last year as a greater supply of new cars became available for purchase.

Shortages of parts, especially computer chips, have caused automakers to cut production well below demand for new vehicles and pushed potential new car buyers, even rental car companies, into the used car market. That shortage of new car inventory helped push both new and used car prices to record highs earlier last year.

But parts supplies and computer chip stocks improved in the latter half of 2022, and with that, used car prices began to fall. Used car prices fell in January 11.6% from a year earlier, according to the consumer price index, the government’s key measure of inflation – the biggest 12-month decline since the depths of the Great Recession in early 2009.

It’s a busy season for used car sales

The busy sales season for used cars it’s just months away—that’s it tied to when potential buyers receive their tax refunds. Dealers are now scrambling to restock and that’s driving up prices.

A strong labor market, in which employers unexpectedly added more than 500,000 jobs in January, also boosted demand for used cars.

“If you want to point to one factor driving auto demand, 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 disruption to the new car market at that time is about to be felt by today’s used car market.

In March and April 2020, auto plants across the country were shut down due to stay-at-home orders and many dealerships closed. Demand for cars also fell sharply amid record job losses and millions of extra workers turned to working from home instead of commuting.

So the drop in car sales in 2020 meant few people were signing three-year leases on new vehicles, contracts that would normally end now and in turn feed those vehicles into the used car market.

“The consequences of the pandemic are coming through,” said Drury. “The the supply definitely won’t be there.” Disruption in the auto markets in 2020 and early 2021 could affect used car prices for most of the year.

“We are entering a period of limited supply of 3- and 4-year-old vehicles, which make up the majority of [used] car sales,” said Michael Manley, CEO of AutoNation (AN), the nation’s largest auto dealer, on a call with investors on Friday. “And that will affect wholesale prices and ultimately retail prices.”

It’s hard to know how long the rise in used car prices will last.

The labor market and consumer spending are strong right now, but there are still concerns about a possible recession. The Federal Reserve looks likely to continue raising interest rates, at least in the near term, which in turn will raise the cost of auto loans and the financing that auto dealers use to purchase their own inventory.

The decline in used car prices has been a major factor in slowing inflation, but a sustained rise in used car prices could make it harder for the Federal Reserve to back away from raising interest rates.

Overall, prices rose 6.4% over the past 12 months, according to the CPI, but that reading has fallen for seven straight months. And prices would have risen 6.9% over the same 12-month period if used car prices had seen such a sharp drop and instead simply remained flat.

So broader economic conditions in the U.S. economy will certainly have an effect on used car supply, demand and pricing, making predicting future prices very difficult, Frey said.

“I don’t think this latest increase is a moment. But I imagine prices could come down after the spring and the tax refunds come in,” Frey said. But he added that predictions are difficult to make in the current market.

“We’re calling for a 4 percent drop in prices from December last year to December this year,” Frey said. “We may have to reconsider that.”

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