Used car prices have stopped going down. Rates for used car loans haven’t stopped going up.
Mario Tama/Getty Images
Used cars deals are slowing drying up. And used car prices have some support from an unlikely source: Covid-19. While that isn’t a bad thing for the car industry and investors, it is a bummer for potential car buyers.
On Wednesday, used car data information provider Manheim released its used vehicle value index reading for January. The index came in at 224.8 in January, jumping 2.5% from December’s 219.3 reading. It’s the second consecutive monthly increase.
Used car prices remain historically high, about 46% above prepandemic levels, but values had been falling until Wednesday’s fresh data. Coming into the December rise, values had slipped for six consecutive months and nine out of the past 10.
The surprising data sent a number of auto stocks higher on Wednesday, while shares of the online used car dealer
Carvana
(ticker: CVNA) surged some 22%. Although Carvana has seen a strong bounce so far in 2023, its stock remains down about 90% over the past 12 months.
Part of the increase is explained by volumes. January used vehicle sales rose 16% compared with December—more demand always pushes up prices.
Another factor that should keep used vehicle prices elevated is actually Covid-19. The sweet spot for a pre-owned car is about three years old, because those vehicles have depreciated by about 40% and can still have some warranty coverage.
Three years ago, in 2020, new car sales dropped 15% to about 14.5 million units. That means there is less three-year-old inventory available than in prior years.
U.S. new car sales have averaged about 14.3 million annually for the past three years. That average was 17.1 million in the three years leading up to the pandemic.
Of course, many other factors go into used car pricing, including the price of new cars. But overall car buyers, and investors, should prepare for stable used car prices, at the very least.
That isn’t all that bad for investors. Most analysts assume new car prices will fall in 2023 compared with 2022. Continued higher used car values will alleviate some pressure to reduce new car prices. Stable prices are also good for dealerships; dealers don’t want to see something they bought a month ago decline in value when they try to sell it.
Ford Motor
(F) and
General Motors
(GM) shares are up 1.5% and 0.7% in midday trading, respectively.
CarMax
(KMX) stock is up 0.9%. The
S&P 500
and
Dow Jones Industrial Average
are down 0.6% and 0.2%, respectively.
The story for consumers, however, isn’t that rosy. The prospect for ongoing elevated used car prices also comes as interest rates on used car loans are hitting record highs.
The average rate for a new car loan in January was 10.57%, according to auto data provider Edmunds. That’s up from 9% just a few months ago.
That additional 1.57 percentage points can add a few hundred dollars to a used car buyer’s annual bill.
Write to Al Root at allen.root@dowjones.com
Credit: marketwatch.com