Wholesale prices for used vehicles fell, but not retail prices; They’re still in the ridiculous zone

The buyers’ strike is in effect. Retail sales of used vehicles are plummeting, dealers are singing the blues but unwilling to cut prices from their ridiculous levels.

By Wolf Richter for WOLF STREET.

The problem with used vehicle prices is that wholesale prices at auction have been plunging all year, and fell again in October, and that’s where dealerships buy a lot of their inventory. .

But retail prices for used vehicles haven’t come down, even as retail sales have fallen amid a buyers’ strike following ridiculous price spikes in 2021 and 2020. And there’s a pressure on dealers to reduce prices, and dealers complain about this environment and drive down sales. But they’re still furiously trying to keep those ridiculous retail prices down for as long as they can.

Wholesale prices for used vehicles have fallen 2.2% in October compared to September, 16% compared to the December and January peak, and 10.6% year-over-year, the first year-over-year decline since May 2020, according to data from Manheim, the largest car auction house in the United States and a unit of Cox Automotive. Compared to October 2020, despite the recent decline, the index is still up 24%, showing how ridiculous the price spike has been.

Wholesale prices reflect input costs for dealers. The cost of newly purchased inventory has fallen throughout the year. And generally, companies do not complain when the price of their inputs goes down.

But whatever vehicles they had in the field for a while, they were purchased at the higher prices prevailing at the time, and that’s a problem for dealers.

And since these input costs are falling for all dealers, price competition will eventually have an effect on the retail prices charged by dealers, but dealers are furiously trying to hold their own.

In 2020 and 2021, dealers had their eyes on the sudden willingness of buyers to pay anything, even paying more for a used vehicle than an equivalent new vehicle would have cost, if any. had. This special effect of paying anything was partly due to the torrent of free money that has been raining down on everything and everyone since the spring of 2020.

The “average listing price” at dealerships hasn’t budged This year. At $28,237 in September, it was roughly unchanged from December, according to Cox Automotive (it will release October data in a few days). This reflects the average price at which dealers advertise their retail units.

In the 17-month period from August 2020 to December 2021, the average listing price jumped a ridiculous 41%, as dealers foamed at the mouths of buyers’ sudden willingness to pay anything. what, and they were driving the prices up at auction to ridiculous levels, knowing that they are still making historic gross profits selling these vehicles at even higher prices to retail customers suddenly willing to pay anything.

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

The consumer price index for used vehicles did not fall either, but has been teetering in the ridiculous zone since February. In September, it was still up 7.2% year over year, and 34% from September 2020, that’s how ridiculous the whole spike was.

But there’s never been a shortage of used vehicles to justify the ridiculous price spike.. In February 2020, before the distortions of the pandemic, there were 2.95 million used vehicles in stock at dealerships. During the first months of the pandemic, stocks fell, but never in the “shortage” range, then they largely recovered. So far this year, inventory has been around 2.46 million, according to data from Cox Automotive:

Vehicles are discretionary purchases: most people can easily drive what they already have for another year or three. But buyers were suddenly ready to pay anything – that’s when the inflationary mindset started. The whole industry took the ball and ran with it, and they ran as fast and as far as they could. The race ended late last year in the ridiculous zone.

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

A sharp drop in retail prices to less derisory levels would stimulate demand. But lower retail prices are the last thing dealers want. But it would definitely increase sales.

Supply is back to normal and ticked up to 50 days in September, where it was before the pandemic, given the drop in sales this year:

Used car dealerships sing the blues.

CarMax, the largest used vehicle dealership in the United States, said in its latest earnings report that in the quarter ending August 31, same-store retail used vehicle sales, in terms of number of units sold, fell 8.3% year on year. from; and total unit retail sales fell 6.4%.

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

Gross profit for its retail unit rose to $2,282 per vehicle, “an increase of $97 per unit despite sharp market depreciation,” as its earnings report said.

This higher gross margin reflects the dynamics of selling prices and the lower costs of vehicles purchased on the wholesale market. Its net profit fell 56% to $126 million.

That was until August, and the retail price situation remained difficult, and shares of CarMax fell 59% from the peak of November 2021 mania.

But the folks at CarMax are the adults in the room; they have gone through a turning market many times before. And they were still making money.

This cannot be said for Carvana, the largest pure online used car dealership. Similar to CarMax, it reported an 8% drop in the number of used vehicles sold at retail, but its gross profit per unit fell 25%, its expenses jumped and its net loss soared to 508 million of dollars. Its shares plunged 39% on Friday, following its disastrous earnings report, and today are down another 15.8% today, closing at $7.39, after plunging from 98% from the August 2021 peak.

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