- The U.S. market continues to be immersed in volatility due to acute macroeconomic conditions.
- Inflation appears to be stagnant and central bank authorities are maneuvering to prevent prices from rebounding.
- Amid this backdrop, companies in all sectors are experiencing sharp swings in their respective markets.
A few days ago, Carvana’s quarterly and annual results were released, which suggested the possibility of bankruptcy for the used car trader. Among the problems that plagued the company, the fall in used car prices stood out. The latter was due to the improvement of the zero-kilometer market.
But it didn’t take long for the prices of these used goods to increase dramatically at wholesale prices. Although the aforementioned company is in a major quagmire, the increase in cars comes as a relief from a pressure that seemed to be absorbing the sector. According to major analyst firms, prices of these cars are experiencing the largest month-over-month increase since 2009.
In that regard, used car prices rose 4.3% in February compared to January, according to Cox Automotive. In spite of this stretch, prices are still -7% compared to the unprecedented rise they experienced last year. In any case, the specialized company assures that the trend towards records is apparently returning solidly.
According to the same source, this is the third month in a row of price increases for wholesale used machines. The main disappointments are consumers who were hoping to catch a good deal this year.
Used car market seems to revive
As mentioned above, used cars remain far from last year’s insane price rise. However, for Cox, that doesn’t translate into an overall market decline – quite the opposite. According to a recent report from the firm, demand is reviving and prices are expected to continue to rise in the coming months.
Apart from consumers, the news of the increase comes as a bucket of cold water for government authorities. As a result, the Biden administration views the used car market as a thermometer for measuring the temperature of inflation. Thus, government officials believe that if that market is hot, so will be consumer prices, and vice versa.
In the same vein, it should be noted that this Tuesday, Federal Reserve Chairman Jerome Powell was not at all ambiguous. In his speech before the legislators, he stressed that there are signs of a reversal in the trend of a slowdown in inflation. This would force the central bank to raise rates higher than previously estimated. Thus, from the 4.5% to 4.75% range, it would move above 5%.
In the case of the used car market, this translates into an increase. The reason for the latter is that large companies in the sector would have production and sales difficulties. Customers would think twice before taking on debt to buy a new car, as they would have to pay higher prices with higher interest rates. Hence, turning again to the second-hand car market is the only option in sight.
The same trend for the retail and wholesale market
Although Cox’s data focuses on the wholesale used car market, that is mirrored at retail. The average price of cars in the former is $26,510. It’s worth noting that at the peak of last year, that average stood at $28,000.
Although the retail sector experienced a sharp decline, it would be a matter of time before it follows the upward movements. There are many reasons why used car prices have risen so sharply over the past few years. From the onset of the pandemic, accelerated price growth began.
The pandemic caused upheavals in the supply chain of major manufacturers. Such is the case of the chip market, which forced some companies to cut production and even postpone the launch of recent models. Faced with such a lack of options and with a lot of money saved, people got out of the confinements by buying used cars at will.
Although automakers are now offering advantages to users to buy new cars, macroeconomic conditions show the other side. With the specter of a recession looming, the last thing people would want is to go into multi-year debt for a vehicle. This again highlights the attractiveness of used cars.
This situation contrasts with that of the nascent electric car market. The second-hand market for electric cars becomes the biggest source of losses for buyers. With this scenario, the only certainty is that prices seem unlikely to fall back this year and buyers are aware of this.
New cars are becoming more and more expensive
But if used cars have a huge increase in price, this is dwarfed by new cars. Cars just out of the dealership are at prices that are difficult to access for people who want to buy them. According to recent data, models under $25,000 are down to just 10.
Many manufacturers seem to focus most of their production on luxury cars. It should not be lost sight of the fact that the luxury sector is one of the most resilient to economic conditions. Hence, low car prices are extremely rare in the U.S. market and elsewhere in the world.
The aforementioned Cox report states that the entire new car market is becoming eminently luxury. In other words, only the wealthy are in a position to buy a new car off the dealership lot. This audience has few problems with interest rates because their purchases are not usually on credit.
The trend is expressed almost identically in other markets such as the EU and UK.
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