Demand for used cars is through the roof, but it’s hard to know when it has reached a peak. Some think that will be sooner rather than later.
The reasons demand for used cars is high aren’t particularly interesting—a shortage of new cars because of factory closures, stimulus payments being used to buy cars, and interest rates on used car loans being low, among other reasons—but slightly more interesting is the question of when those conditions will change.
Dealers, in particular, have been subject to what looks on the outside like a form of pure gambling. Some of them, for example, didn’t buy much used car stock in March and April, when used car prices were down, and so they find themselves now running low on used cars. Others had the foresight (or most likely just dumb luck) to buy a lot of used cars in March and April, meaning that the prices they are now selling them for includes a huge profit.
The Wall Street Journal recently caught up with one dealer in the former group:
Like many dealers, Peter Lanzavecchia, owner of a Marlton, N.J., store that sells Hyundai, Buick and GMC vehicles, stopped buying used vehicles when the pandemic hit because he was conserving cash and fearful of sitting on a stock of rapidly depreciating vehicles.
“We backed off out of sheer fear of the unknown about where all this was going and how far values would slide,” he said.
But in recent weeks, the situation has flipped: His used-car lot is bustling, and he’s running low on inventory.
“Now we’re just scrambling to purchase more,” he said.
Used car sales were up 17 percent in June according to the WSJ, and that’s compared to a JD Power projection from before the pandemic. To put a finer point on that, JD Power thought that before there was a worldwide pandemic used car sales would be 17 percent lower than they are right now, meaning that even in a time of great economic uncertainty a lot of people are choosing to go through with what for most is the second-biggest purchase in their life.
What’s also interesting is that despite big fluctuations in wholesale prices, retail prices have not been fluctuating as much, meaning you may not have even noticed much of a blip, especially at dealerships. Prices there were only down a few percentage points in the spring, while wholesale prices were down double digits.
That means that consumers didn’t really have the opportunity to take advantage of lower prices at the beginning of the pandemic, even as a lot of dealers did.
The retail prices that buyers pay at dealerships have been more stable, declining only 3%-5% this spring before recovering. That means dealers who were buying used cars from auctions on the cheap in late March and April enjoyed unusually big profit margins, said Jonathan Smoke, chief economist at Cox Automotive, which owns Manheim.
It’s interesting how things never seem to trickle down, though I’m getting word we might have built an entire economy this way.
Anyway, as factories produce more new cars, rental fleets get purged, and more leased cars get returned in the coming weeks, the used market will eventually stabilize, which could be a reason to hold off buying for now, if you think prices will eventually go down, as one expert quoted by the WSJ thinks. But it’s also usually a bad idea to try and outsmart the market, while a lot of people don’t have the choice.