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Used vehicle prices are finally dropping but won’t completely plunge back to Earth in this crazy environment. here’s why

By on April 9, 2022 0

Despite increased tax refunds, crucial for down payments, retail sales of used cars and trucks fell and auction prices fell as price resistance set in.

By Wolf Richter for WOLF STREET.

According to the estimates of Cox Automotive, based on its Dealertrack data. Blame slow tax refunds? Blame the unsustainable crazy price spike? So let’s see.

Tax refunds are crucial for the used car industry at this time of year. They make big down payments. And the whole industry relies on them and analyzes them.

Based on IRS data through April 1, the IRS has issued $204 billion in refunds, up 13.4% from the same period last year, with 98% deposited directly into taxpayers’ bank accounts, and they have already received this money.

The number of refunds issued rose 1.7% from a year ago, to 63.36 million refunds through April 1. The average reimbursement amount jumped 11.5% to $3,226, an excellent down payment for a car.

So 1.7% more people received their refunds than last year at this time, and they received much larger refunds on average, which is potentially more and larger down payments – and that’s that’s why the number of used vehicles sold in March should have at least matched last year’s total. But sales fell 15%.

And that’s where crazy price spikes come in. The whole industry shook its head about them: that retail customers paid these prices when there was plenty of supply; that dealers then raise wholesale auction prices to ridiculous levels, knowing that they could pass those prices on to retail customers and make huge gross profits per vehicle; and that the lenders accepted the ridiculous collateral values ​​and lent. And everyone, astonished as they were by this bizarre phenomenon, played the game as long as possible.

But in March, wholesale prices for used vehicles sold at auction fell 3.3% from February on a blended, mileage and seasonally adjusted basis, according to the Manheim Used Vehicle Value Index. Manheim, a unit of Cox Automotive, operates nationwide and online wholesale auto auctions that handle approximately 8 million vehicles annually.

Compared to March of last year, which was already in the middle of the spectacular price spike, prices rose 24.8%, a ridiculously huge jump, but it was the smallest jump in a year on the other since August 2021.

It takes about two months for changes in wholesale prices to be reflected in retail prices, as tracked by the consumer price index for used vehicles.

The March CPI will be released next week. In February, the CPI for used vehicles was up 41% from a year ago, which before that time was an all-time fantastic record. But there was already a slight drop from January:

The fact that used vehicle sales – in terms of the number of vehicles sold – are down despite rising tax refunds shows that there is growing, albeit still small, resistance among retail buyers. to these record and fantastic price spikes.

High-pressure steam was starting to exit the market in November, which became apparent in the underlying metrics, and those metrics weakened further in December. In January, wholesale prices were stable for the first time since August, seasonally adjusted. And in February, prices fell 2.1%, seasonally adjusted. And now, in March, they are down 3.3% seasonally adjusted.

Unadjusted for seasonality, the index rose 0.6% from February, less than the normal seasonal increase from February to March, tax refund season.

The three-year Manheim index, which is not seasonally adjusted, fell 5.9% from the start of the year to week 10, a much larger drop than in previous years through 2014. During over the past four weeks, it has increased by 1.2%. % but remains down around 4.5% for the year so far. And even the $204 billion in tax refunds that have now flooded the country have barely moved the needle.

And there’s another underlying metric that indicates price resistance: Manheim’s average daily conversion rate for March auctions, at 57.1%, was below the normal level for this time of year. For example, in March 2019, it averaged 62.7%, according to Manheim. The below normal conversion rates started last November and indicate that buyers have more bargaining power, that there is less interest and less competition for vehicles at these prices.

And there are plenty of used vehicles on dealer lots. At the end of March, dealers found themselves with a 44-day supply, up from 32 days a year ago, according to Cox Automotive. For comparison, the average supply in 2019 was 48 days (purple line):

Price resistance means it will be harder to maintain sales volume at these ridiculous prices. Lower retail prices – although still ridiculously high – would increase sales volume. But the limit will be the offer. Supply is plentiful at the current sales volume. But higher sales volume would put more pressure on supply.

And the supply of used vehicles is limited by the reduction in new vehicle production volumes over the past two years. Chip shortages continue to hamper production this year. Large fleets, such as rental companies, supply the used vehicle market with millions of vehicles a year, but they find it difficult to obtain new vehicles and they hang on to vehicles in their fleets longer. And the number of new vehicles sold fell 26% in March from a year ago, so trade is down – another major source of used vehicles. So retail prices for used vehicles may finally come down, but they’re unlikely to come down to earth again in this crazy environment.

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