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In this month’s Market First Report, we talked about how despite declining over the last two months, used vehicle prices are back on the rise. Will this trend continue, or will used car prices be on the way back down soon? Here is our take on the matter and what it will mean for auto dealers.
Why are used car prices so high?
According to ZeroSum data, out of the last six months, four months have recorded an increase in the average used car price, with the only decreases coming in May and June of this year at less than half a percent each. Since this time last year, used vehicle prices are up almost 15%. New car prices are also high and have remained above MSRP all year. Because of this, one man who refused to pay above MSRP ended up traveling over 3,000 miles to pick up a new Toyota.
What we are seeing here is a chain reaction. As a result of global chip shortages, COVID shutdowns, and supply chain issues, new car production has been stunted, causing new vehicle inventory to remain in a tight squeeze and prices to rise. With less options available for new cars, many consumers are switching over to used cars, driving both demand and prices upwards. The above chart shows the inverse relationship between new car inventory and used car pricing. Used vehicle prices are much more strongly correlated to new vehicle inventory than to used vehicle inventory. As a result, when new inventory is down, used prices spike, and many consumers are still willing to pay despite the high prices.
When will prices come down?
Despite increasing 1.14% in July, used car prices have only increased a total of 1.78% over the last six months. For comparison, in the previous six months, prices soared 9.53%. This indicated that although prices are still trending upward overall, they are longer increasing at nearly as high of a rate as they were before. If new inventory rises, based on historical data, ZeroSum predicts that we will see used car prices start to come down again by the end of 2022. However, if new inventory decreases, we expect used vehicle prices to increase.
What does this mean for dealers?
With lower prices on the horizon, dealers will need to be both cautious and strategic when buying and pricing used cars. While prices are still high, dealers should continue to turn as fast as possible to maximize profits. As prices fall, dealers should look to purchase used cars for less cost while selling the cars they have already purchased. At the same time, dealers will need to keep a very close eye on market prices and strategically adjust to ensure they stay competitive.
Dealers should also look for opportunities to sell more electric vehicles as demand rises. This month, the price of used electric cars far exceeded average prices at $55,204 according to ZeroSum data. When overall used prices fall, it is possible that EV prices stay higher for longer or do not decrease at all. For this reason, stocking and selling EVs provides dealers a great opportunity to maintain profit as prices dip.
Want to stay up to date on the latest inventory and pricing trends in the auto industry? Keep an eye out for the ZeroSum Market First Report, published monthly. Download a free copy of the latest report here:
