Later this month, Berman Auto Group will host what has become a rare event at an auto dealership over the past two years: a sales event.
The company bought about 150 vehicles in April when it opened another site in Metro Chicago, setting prices at a market benchmark that had skyrocketed since 2020. Vice President Ross Berman then watched helplessly as vehicle prices Used cars have started to go downhill, eroding dealers’ profit margins for vehicles they hadn’t yet sold.
“They’re a sign to me of how much has changed in the last few months,” Berman said. For Black Friday, the shopping bonanza after the Thanksgiving holiday, it offers zero percent financing. “We want to sell these cars.”
Rising used-car prices helped drive the worst US inflation in a generation. Government statistics show that prices are 49% higher than in June 2020 in the early days of the pandemic.
While prices are still high by historical standards, gains are sharply decelerating. In October, they rose 2% year over year, the U.S. Bureau of Labor Statistics reported last week, down from an annual rate of more than 40% in early 2022. com, the average price for a used vehicle in October was down more than 3% from a year earlier to $23,499.
The decrease has consequences for manufacturers, retailers, lenders, buyers and potentially the wider economy as inflation shows signs of cooling.
The price hike over the past two years has been fueled by shortages of new cars and trucks, as the worldwide shortage of semiconductor chips limited the number of vehicles automakers could produce. The shrinking supply of new vehicles has forced more consumers to turn to the used market, including car rental companies hungry to refuel the fleets they had reduced during the Covid-19 pandemic shutdowns.
Now, an increased supply of new cars and trucks, plus interest rates rising as the Federal Reserve fights inflation, are causing used-car demand to drop. Dealerships are cutting prices to keep car payments attractive to buyers as higher loan costs make financing less affordable.
“The Federal Reserve has made the decision to raise interest rates and, for better or for worse, it’s doing its job,” Berman said. “It’s basically slowing consumer demand. The same vehicle at the same price will cost the customer much more today. This, by default, reduces the demand for those cars.
Falling used car prices are being felt by both family-owned dealerships and large chains. Two publicly traded retailers, Carvana and CarMax, both outperformed the S&P 500 stock index in 2020 and 2021, but CarMax’s share price is down 44% this year, while Carvana’s is down 96% .
S&P Global recently changed its outlook on Carvana to negative due to weakening profit margins, cash flows and liquidity. More than half of the retailer’s per-unit gross profit comes from the sale of loans and other products, but Carvana is poised to lose a share of that business.
“As interest rates rise, it’s harder for Carvana to compete with the big banks that can keep lending rates low,” said S&P analysts David Binns and Nishit Madlani.
The company would need to seek new capital to maintain liquidity in 2024, they added.
Falling used-vehicle prices have traditionally been “the canary in the coal mine” for new cars and trucks, said Steve Brown, an analyst at Fitch Ratings. They signaled a drop in demand for new vehicles, forcing price cuts and, in turn, lower output from manufacturers.
That pattern may no longer hold up. U.S. automakers produced, on average, about 11.2 million vehicles a year in the five years leading up to the pandemic, said Kristin Dziczek, an automotive policy adviser at the Federal Reserve Bank of Chicago.
But the chip shortage has curtailed production: They made just under 9 million a year in 2020 and 2021, and are expected to produce less than 10 million this year. Because manufacturers have built fewer new vehicles than consumers want to buy in the past two years, falling used-vehicle prices may not translate into lower prices for new cars and trucks.
Automakers have also spent the last couple of years allocating scarce chips to more expensive versions of their most profitable vehicles, essentially abandoning the low-end of the market. Less affluent customers have entered the used vehicle market. Automakers may be less inclined to cut prices even if supplies rebound “because the low-end buyer is out of business,” Brown said.
In wholesale auctions, buyers are no longer willing to pay what sellers ask, said Omair Sharif, president of Inflation Insights, a forecasting and analytics group. The US consumer price index for used cars fell 2.4% from September to October.
With used vehicles making up 5 percent of the basket of goods used to track inflation, October’s decline in used vehicle prices subtracted more than a tenth from the core inflation rate, Sharif said.
“It’s going to become an anchor and lower core rate as we go forward,” he said. While everyday purchases like groceries influence people’s perception of inflation the most, “even if you don’t buy a used car every week, it still helps to see that the data is going down.”