The used car market became a thriving marketplace for people looking to buy a vehicle. However, it seems that it has reached its peak after three years. Will this affect prices for various cars, trucks, and other vehicles in the used car market?
Why do people choose used vehicles?
Purchasing a second-hand car or pickup truck is cheaper than buying a brand-new one. Used vehicles do not depreciate as fast as new cars. The value of a new car will drop immediately after it hits the road. Statistics indicate that new pickup trucks lose more than 15 percent of their value after they are out of the dealers.
Even when you do not take depreciation into account, you can lessen numerous expenses by purchasing a used car. For pre-owned cars, you will only pay lower sales tax. When it comes to insurance rates, the value of the vehicle is the main consideration of insurance companies. Since a brand-new car holds a greater value on paper, the insurance rate is steeper. But due to the depreciated value of second-hand vehicles, the insurance costs are lower.
Moreover, there’s more freedom to customize the car than when you buy a new one. If you’re planning to change the wheel and tires, or just add a few mods, then a second-hand car may be the right option for you.
Used car demand
Pandemic-induced problems and other difficulties rattled the automotive industry. The chip shortage bunged vehicle production, and the global supply chain delayed the assembly of car and truck parts. The complications resulted in lower inventories and lower sales for many carmakers.
Many businesses, including the automotive industry, had been disturbed by the pandemic. The Covid outbreak halted the movement of people but it did not stop the demand for vehicles. Since dealers do not have enough units in their inventories, a lot of prospective buyers flocked to search the used car market. Prices marked up when the demand in the used car market swelled.
The shortage of brand-new vehicles fueled the demand for used cars. However, buyers were slapped with high prices. After reaching a peak in February, the average prices of used vehicles have been on the decline. More substantial drops were seen until the end of 2022.
According to the consumer price index of the Bureau of Labor Statistics, there was a 2.9 percent drop in spending on used cars and trucks in November. From November 2021 to November 2022, consumer spending on used vehicles also fell by 3.3 percent.
Inflation impacts car sales trend
For brand-new and used cars alike, the rising sticker prices dampened consumer demand, resulting in plummeted sales. With 13.5 million in September 2022, the seasonally adjusted annual rate (SAAR) of U.S. light vehicle sales remains at recessionary levels.
The Federal Reserve has the power to raise the rates to combat inflation. Though, the downside is it will be harder for a lot of Americans to commit to monthly payments, whether it’s for new or used vehicle purchases.
J.P. Morgan has published in their research that there’s demand destruction taking place. Consumers express record-low sentiments toward purchasing new vehicles as they cite rising interest rates and high prices.
Rising prices are not only happening in the new car market, but in the used car market too. The sales shrunk 8 percent year-over-year in September 2022. The declining demand is plaguing the industry. Aside from the slow economic activity, the automotive industry is faced with asset price deflation, rising interest rates, and weakening consumer confidence. All these problems are weighing on consumer sentiment, as well as pushing potential buyers out of the market.
High loan interest rates
The prices of used cars spiked throughout much of 2021. But now, it seems that prices have begun to come down. According to a research and consulting firm, Cox Automotive, the average list price for used vehicles at the end of December 2022 was $27,077. It is $683 less than the average for December 2021.
The wholesale and retail used car prices have declined, while new vehicle prices keep setting positive records. Despite the price of used cars getting cheaper, auto loan interest rates remain high. The average rate for used vehicles reached 10 percent at the end of 2022, which has been crushing buyer demand.
Cox Automotive’s chief economist, Jonathan Smoke, said in Money.com’s interview that further interest rate hikes will likely weaken the demand for used vehicles. The additional interest rate hikes from Federal Reserve are expected to peak in the spring of 2023. After that, the market might start to get stronger again.
It is also pointed out in a Consumer Reports article. As car prices ease from all-time highs, monthly payments are ramped up by higher interest rates, so purchasing is still a challenge. The impact of high loan interest rates on the automobile industry has been severe, especially on the side of the used vehicle market.
With fewer buyers in the market, the used car values are forecasted to drop in the first half of the year. However, the demand could pick back up in the year’s second half, especially if auto loan interest rates normalize.
Different things can still disrupt the industry. The whole car market is being reshaped by how the automakers sell and the number of orders.
Even if the prices of used cars continue to ease slowly, new car sales have started to soar. Supply chain woes have eased a bit, so the production of brand-new vehicles increased. Analysts have seen a rise in the vehicle supply, putting less pressure on the prices of used cars. The new-car spending is gaining traction as it jumped 7.2 percent over the 12 months.
Many vehicle segments have fallen off their peak prices, but some still are lingering near record-high prices. For people who want to sell their used vehicles, now is the time to make a profit. Do this before the prices fall further on your trade-in. For those planning to buy, you must explore various options to find the best value.
A lot of vehicle buyers are hoping that 2023 to be a year of relative stability compared to what happened in the previous years. However, people must brace themselves because 2023 won’t be a year of bargains.