The past year has been a wild ride for the used car market. A new car shortage caused by supply chain bottlenecks and insufficient production of auto chips had dealers slapping eye-popping price tags onto their inventory.
This was overlaid on economy-wide labor shortages and the rising costs of running a dealership. Prices soared well above inflation for most other consumer goods. And while prices remain far above where they were before these disruptions, recently there have been signs that things might be looking up for consumers in need of a new (used) ride – at least for those who don’t mind shopping online.
Last month, data from our parent company Thinknum Alternative Data showed that online used car prices had taken a slight dip. Though a 3% month-over-month price decline after almost a year of continual rising is hardly a reason to celebrate, it suggested that the price trend might be reversing. A few weeks down the road, we now see a potential cause.
According to Thinknum’s current data, the inventory at online used car marketplace CarMax has grown by more than 75% since the beginning of the year. The auto industry traditionally measures inventory in terms of the number of days that its current stock can last, given the current levels of demand. The company now has enough cars in stock to fulfill thirty days’ worth of demand.
While champagne and fireworks may still be premature, this is certainly a cause for optimism. The inability of car manufacturers to keep up with demand is largely responsible for the current exuberant prices for both new and used vehicles. Rising inventories could be an indication that dealers are finding ways to work around the supply issues, which might lead to some relief on the pricing front.
CarMax and other online auto sellers source a substantial part of their inventory from individual car owners. The offer price is determined by an algorithm and is usually higher than what one can expect from a brick-and-mortar dealership. This sets them up to be more competitive in building up inventory, while their rich customer data repositories make them more nimble at fulfilling consumer demand.
Despite their unique position in the market, the rising inventories at online used car sellers might be a sign of a turning tide for the auto industry as a whole. Some car manufacturers have already increased output, and industry analysts predict that car shortages will continue to abate throughout the year. Additionally, the recent decision of the Federal Reserve to raise interest rates will likely cool down demand for cars, as the cost of auto financing is due to rise. While we are still far from being out of the inflationary woods, the data suggests that we may be slowly on our way.
However, the automotive industry will continue to face its old challenges and will have to adjust to new ones created by global calamities. The war in Ukraine has led to new supply chain disruptions, manufacturing difficulties, and additional inflation driven by the rising fuel costs. The recent disruptions in the operations of some Chinese ports and manufacturing facilities due to COVID outbreaks add to the delay in recovery. Nonetheless, these factors will hopefully prove to be only a temporary setback for the used car market’s return to equilibrium.