Used car wholesale prices down, but not retail prices; You’re still in the Ridiculous Zone

Used car wholesale prices down, but not retail prices;  You're still in the Ridiculous Zone
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The buyers’ strike is in force. Used car retail sales are falling, dealers are singing the blues but won’t lower prices from their ridiculous levels.

Through Wolf Richter to the WOLF ROAD.

The thing about used car prices is that wholesale prices at auction have been falling all year and fell again in October, and dealers are buying a large chunk of their inventory here.

But used-car retail prices haven’t fallen, even as retail sales fell after ridiculous price spikes in 2021 and 2020 amid a buyers’ strike. And dealers are under pressure to cut prices and dealers are grumbling about this environment and the drop in sales. But they’re still furiously trying to keep these ridiculous retail prices going for as long as possible.

Wholesale prices for used cars fell up 2.2% in October from September, up 16% from the peak in December and January and down 10.6% year-on-year, the first year-on-year decline since May 2020, according to data from Manheim, the largest auto auction house in the US United States and a unit of Cox Automotive. Compared to October 2020, the index is still up 24% despite the recent drop, showing how ridiculous the price hike was.

Wholesale prices reflect the input costs for traders. The cost of newly purchased goods has fallen throughout the year. And companies generally don’t complain when their input prices fall.

But whatever they had in the parking lot for a while was being bought at the higher prices then in force, and that’s a problem for dealers.

And as these input costs fall for all traders, price competition will eventually affect the retail prices that traders charge, but traders are furiously trying to hold the line.

In 2020 and 2021, dealers had looked soberly at buyers’ sudden willingness to pay for everything, even if they were paying more for a used car than an equivalent new car would have cost if there had been any. This pay-anything special was in part due to the deluge of free money that has been raining down on everything and everyone since the spring of 2020.

The “average list price” at dealers is not budgeted this year. At $28,237 in September, it was roughly flat from December, according to Cox Automotive (it will release October data in a few days). This reflects the average price at which retailers advertise their sales units.

In the 17 months from August 2020 to December 2021, the average list price rose a paltry 41% as traders foamed at the mouth at buyers’ sudden willingness to pay and pushed prices at auctions to ridiculous levels, knowing that they’re still making historic gross profits by selling these vehicles at even higher prices to retail customers who are suddenly willing to pay anything.

This mania peaked in December and January. But list prices just haven’t gone down since:

The consumer price index for used cars has not fallen either, but has been wobbling in the ridiculous zone since February. It was still up 7.2% year over year in September, and it’s up 34% since September 2020, the whole rise was so ridiculous.

But there’s never been a shortage of used cars to justify the ridiculous price hike. In February 2020, before the upheavals of the pandemic, there were 2.95 million used cars in dealer stocks. In the early months of the pandemic, inventories fell, but never into “scarcity” territory, and then largely recovered. Inventory has been in the range of 2.46 million so far this year, according to data from Cox Automotive:

Vehicles are free purchases: most people can easily drive what they already have for another year to three years. But buyers were suddenly willing to pay anything – and that was the start of the inflationary mindset. The entire industry picked up the ball and ran with it, and they ran as fast and as far as they could. The run ended in the laughter zone late last year.

Demand at these prices has decreased for two reasons: first, the prices are just ridiculous and no one should buy a used vehicle at these prices; and second, the interest rates used to finance used car purchases have skyrocketed, making these ridiculous prices even more expensive. Just say no?

A sharp fall in retail prices to less ridiculous levels would boost demand. But falling retail prices are the last thing retailers want. But it would certainly boost sales.

The supply is back to normal and is up to 50 days in September where it was pre-pandemic given the drop in sales this year:

Used car dealers sing the blues.

CarMax, the largest used-car dealership in the U.S., said in its most recent earnings report that in the quarter ended Aug. 31, retail sales of used vehicles at comparable stores, as measured by the number of units sold, declined 8.3% year-on-year and total retail sales declined 6.4%.

Despite the drop in sales, CarMax reported that its average retail selling price rose 9.6% to $28,657 per vehicle sold.

Its retail unit gross profit rose to $2,282 per vehicle, “an increase of $97 per unit despite strong market depreciation,” according to its earnings report.

This higher gross profit reflects the dynamics in sales prices and the decreasing cost of vehicles purchased on the wholesale market. Net income fell 56% to $126 million.

That lasted through August, and retail pricing remained tough, with shares of CarMax down 59% since the mania peaked in November 2021.

But the folks at CarMax are the adults in the room; You’ve been through a spinning market many times. And they still made money.

This does not apply to Carvana, the largest purely online used car dealer. Similar to CarMax, the company reported an 8% decline in the number of used cars sold at retail, but its gross profit per unit plunged 25%, its expenses soared, and its net loss rose to $508 million. Its shares plunged 39% on Friday after the disastrous earnings report and are down another 15.8% today to close at $7.39. down 98% since peaking in August 2021.

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