Used vehicle prices have been surging as demand continues to soar, spurred on by a global chip shortage that has severely limited the availability of new vehicles. But that may be changing.
8/23/2021
Used vehicle prices are up somewhere in the range of 20% – 30% over last year. That means a pre-owned pickup truck that would have sold for around $30k last year now has a price approaching $40k. Consumers are asking themselves if it’s worth it, and if they might be better off making do with what they have until prices come back down a bit.
Vehicle retailers closely track a measurement called Market Days Supply – the amount of time it would take to sell out of a particular type of vehicle, if no replacements were added back into the supply. Most retailers chase the industry benchmark of stocking a 30-45 day supply in mainstream categories of used vehicles.
Aside from the initial lockdowns in March of 2020, demand for vehicles has remained strong throughout the pandemic’s ups and downs. At the peak of the market, when new vehicle supply was almost non-existent while consumer demand for vehicles surged, retailers saw a market days supply as low as 15 days in popular segments like intermediate SUV’s and late-model pickup trucks. In the face of rising prices, that number has now ballooned to over 100 days supply nationally on most common truck models 2017 and newer.
One reason for softening demand and rising supply as a result of higher prices could be found in the finite nature of cars. Unlike other investments such as real estate or precious metals, which maintain a consistent store of value and appreciate over decades, vehicles have a finite lifespan with a typical duty cycle somewhere in the range of 10-15 years, or 200k-300k miles. There are many variables that factor into how long a vehicle will last, but most used vehicles eventually find their way to a scrapyard. Excluding classics, vehicles that are driven regularly continue depreciating over their life cycle until their value begins to approach that of scrap metal.
Smart vehicle buyers often think of vehicle ownership in terms of “cost per mile.” Add up all vehicle costs including the initial purchase price, taxes and fees, interest on payments, maintenance, repairs, gas, and insurance, and divide the sum by the number of miles driven. Want to drive a brand new S-Class? It’s going to cost you a lot more per mile you drive than a Honda Civic, which has a much lower initial price and lower maintenance costs over time.
As vehicle prices continue to rise, eventually the cost per mile simply becomes too high for consumers to accept and they begin to look elsewhere to solve their transportation needs – repairing a broken vehicle they might already own, borrowing from friends/family, utilizing ride-sharing platforms, using public transportation, or simply putting off the purchase until some point in the future.
When retailers become overstocked, they have two options. Reduce prices to drive retail sales, or liquidate inventory at auction. Recent sale reports from Manheim, the world’s largest wholesale marketplace, have shown certain segments of vehicles like late-model trucks and SUV’s have been transacting significantly below recent averages. It’s only a matter of weeks before this discounted inventory re-enters the marketplace at a lower price, increasing price competition and driving retail prices down.
While the current drop in values could signal an impending crash, it’s more likely a temporary market adjustment as consumers hold off on purchases that no longer make sense for their budgets. While a crash is unlikely, it’s also unlikely that used vehicle prices will climb to previous highs. Vehicle purchase decisions are often emotionally driven and intensely personal. During a time when social events and other types of recreation were limited, many consumers treated themselves to the joy and excitement of an upgraded vehicle despite rising prices. As the world returns to some semblance of normalcy, so will the used car market. For now, more available inventory means lower prices for consumers, a welcome reprieve in a recovering economy.
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