After peaking last year, used car prices appear to be on the way down.
Though how much they will decline in the year ahead from COVID-19 pandemic highs is uncertain as rising interest rates compete with increasing inventory to draw a complicated picture for the automobile market.
One of the most inflated goods during the period following the pandemic has been vehicles. That’s due in large part to a global microchip shortage that wreaked havoc on inventory in 2020-21 as COVID-19 shut down large swaths of the economy. While inventories have since picked up, growing supply and applying downward pressure to prices, higher interest rates as a result of the Federal Reserve’s campaign to drive down inflation have had a contradictory effect on buying because they have made getting a loan more costly.
Joseph Yoon, consumer insights analyst for Edmunds, told the Washington Examiner that the most notable change in the auto market the customers have had to face over the past couple of years has been the inventory shortage following the outset of the coronavirus pandemic.
The economy suffered from a global semiconductor chip shortage. Semiconductors, a vital (and expensive) part of modern-day gadgets and cars, saw a huge uptick in demand over the past few years, particularly during the pandemic, causing a global shortage.
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Some car companies were forced to halt production lines at major factories because of the shortage. Further complicating the matter, the United States relies on foreign countries such as China to provide semiconductors. So when supply from overseas didn’t meet U.S. demand, the country found itself in a bad position.
“People weren’t getting discounts anymore on new or used cars,” Yoon said.
Because new cars were so expensive due to inventory issues, people started buying up used cars to compensate, which, in turn, drove the prices of used cars up alongside new cars. And prices absolutely skyrocketed.
In early February 2021, the average price of a used car was around $22,700, according to an index by CarGurus. By August of that same year, the average price had increased by nearly 30%. A year later, the average price ballooned to more than $31,000 — a whopping 37% increase from February 2021.
“That’s a huge jump in price, especially just over the course of a year or year and a half,” remarked Yoon.
Since August of last year, owing in large part to growing inventories, the average price has fallen to about $28,500, about an 8% decline. But even as prices decline, there is a bit of a tug-of-war dynamic going on for consumers.
“Now, the issue is the inventory levels are finally kind of starting to come back, but the interest rates are super high,” Yoon explained. “So if you’re making monthly payments, you’re expected to pay maybe $50, $75, maybe even $100, $150 more per month just to get the same car that you could have bought previously for less than that maybe two years ago, maybe three years ago.”
Yoon said he expects that to be the defining dynamic for used (and new) car prices this year — whether or not the rising inventory levels actually lead to discounts for consumers. He said that if there aren’t incentives or discounts at the dealership level, it will be “a tough road ahead for car buyers.”
Throughout the pandemic, the Fed kept rates at near zero for a historic amount of time. But given enormous increases in inflation, the Fed has had to jack up its interest rate target. The central bank’s rate target has risen quickly since its first increase in March last year. The monetary tightening marks the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s. The target is now 4.5% to 4.75%, the highest since the financial crisis in 2008.
Average consumers directly experience the effects of rising interest rates in their everyday lives, whether it’s with credit cards, home mortgages, or buying a car.
“For used cars, interest rates are even higher, like close to 10%,” Yoon said.
The rental car market has also experienced the effects of the inventory issues that plagued the industry following the start of the pandemic.
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Daily costs to rent a car surged at the same time that used car prices did. That is because car rental companies had to spend more money to purchase vehicles for their fleets and had to offset some of those costs on customers. While the pace of rental car prices has slowed, they are still elevated.
Rental car companies also sold off some of their fleets during the pandemic, and the shortage of available cars led to higher prices for people trying to rent a vehicle, as demand for such rentals boomed amid pandemic restrictions lifting and leisure and business travel returning.
