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The sharp drop in used car prices - what does it mean and what lies ahead

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New York

Tracking used car prices is enough to give anyone a whiplash.

Since the start of the pandemic and the resulting disruptions to new car supply chains, used car prices have spiked for the first time, used car prices posted their biggest annual increase on record – 45% up 12 months ended in June 2021, according to the Consumer Price Index – before falling to an 8.8% 12-month drop in the most recent December reading.

That was the biggest 12-month drop in used car prices since June 2009, when General Motors and Chrysler were both in bankruptcy and the economy was losing half a million jobs a month.

“It was a completely wild ride,” said Ivan Drury, director of insights at Inc., an online resource for car inventory and information.

Data from Edmunds shows the average purchase price of a used car in December at $29,533, nearly $1,600 below the record high of $31,095 reached in April 2022. The average price of a used car today is about the same as the median price of a new car in 2010 .

While prices for the latest used car models are down just 5% from their peak, according to Edmunds, the price of older used cars, those five years or older, are down 15% or more from their peaks in the beginning of 2022.

Experts say the reasons for the decline include higher interest rates that make it more expensive to finance a car purchase, limiting demand. CarMax (KMX), the country’s largest pure used car dealer, has warned that the combination of high prices and high interest rates is creating an affordability problem for many buyers, hurting overall demand.

But the main reason for the drop in used car prices is the increased supply of new cars.

It was the shortage of new cars that drove up prices. Parts shortages, especially for computer chips, stifled new car production for much of 2022, causing the lowest level of new car sales in the United States since 2011.

The low supply of new cars led to an even bigger jump in the average price of used cars, as buyers who would have bought new vehicles turned to the used car market.

“At one point, it seemed like everyone who was going to buy new ended up buying used,” said Greg Markus, executive vice president of AutoLenders, parent of New Jersey’s largest chain of used car dealerships.

That included car rental companies, which before the pandemic typically bought around 10% or more new cars a year. With a limited supply of cars to sell, automakers basically stopped selling fleets at lower prices and even car rental companies were forced to turn to the used car market.

All of that has started to change in recent months. Automakers are reporting more supplies of the chips they need and are making and selling more cars, including a return to fleet sales. Overall, sales were up 9% in the fourth quarter compared to a year earlier and nearly 6% up from the third quarter, according to Cox Automotive. And with more buyers finding the new cars they want, that means less demand for used cars.

Experts say part of the drop in used car prices is that the price increases were not sustainable and were partly driven by buyers at used car auctions who overpaid for the limited supply of used vehicles.

“There was nowhere for these prices to go but down,” said Markus.

There could be more declines in used car prices in the coming months as new car inventories continue to rise. One thing that could put a floor under used car prices: Late model used cars are likely to be in short supply due to reduced new car production over the past three years.

“The issue of supply is still serious,” said Markus. Because of that, “I don’t think we’re going down to 2019 levels,” he added.

Rising used car prices were a major driver of the country’s overall inflation rate, adding about a percentage point to the overall consumer price rise from April 2021 to May 2022. helps slow inflation, cutting more than a third of a point from the headline rate in December.

This is obviously good news for anyone who wants or needs to buy a used car, although it can have a negative effect on car buyers by reducing the value of the vehicle they are hoping to trade in. Edmunds shows that the average December exchange value is down nearly $3,000, or 11%, to $22,605 from a record high reached in June 2022.

This drop in trade-in values ​​could also be a drag on car prices, reducing what buyers can afford.