If you’re on the hunt for a used car, there may be some good news for you. Data aggregated by Thinknum from a number of online car marketplaces shows that the median used car listing price declined by 3% in January from a month earlier. It’s the first substantial month-to-month decrease since prices began to skyrocket last March. 

The slight dip represents a silver lining in the giant inflationary cloud that has been looming over the used car market for almost a year.

Used cars prices are still far from above where they were before the market disruptions began. According to January data from the Bureau of Labor Statistics, used cars are on average over 40% more expensive than they were a year before. That far exceeds the 7.5% annual inflation rate, the average price increase for all the goods in the consumer price index. 

BLS data also shows that the average sale price for used cars (which includes both online marketplace and dealership sales) went up by 1.5% in January. Thinknum’s data differs from figures in the Consumer Price Index published by the BLS because it tracks the median used car listing price on U.S e-commerce websites. Meanwhile, the BLS computes the average price of all used cars sold to U.S urban consumers.

Lower-income car shoppers have been particularly hard hit by rising prices as cheaper cars brands were subject to the largest price hikes. According to data from the automotive shopping website Cargurus, which publishes the listing prices for used cars, the average year-to-year price increase for the ten cheapest brands tracked by the website brands was 37%. The same number for the ten most expensive brands was just 15%. 

Why prices have spiked

A combination of factors are to blame for rising used car prices. These include all the circumstances that are driving inflation in the broader economy: a chaotic labor market, historically low interest rates and supply chain bottlenecks. Increased demand for a socially-distant form of transportation during the pandemic only added fuel to the fire. 

The most significant cause, however, is a new car shortage that has pushed many consumers into the used car market. The shortage stems from pandemic-induced supply chain issues affecting microchips and other parts used in auto production. A fire at a major auto chip production plant in Japan further exacerbated the supply problem, adding strain to dealer inventories and hitting consumers’ wallets.

For some further insight into the trend I turned to a person who I know has plenty of experience in this market. Vadim Makhlis, the owner of a Ford dealership in rural New Hampshire (who happens to be my uncle), says that some of his customers are on year-long waiting lists for certain vehicle models. 

He blames the inflated prices not just on the shortage of new cars but also on the scarcity of spare parts, which makes repairs lengthier and more costly. According to Makhlis, many of his customers are “forced to shop for a replacement vehicle because they can’t live without a car for the 2 to 3 months that it might take for it to get fixed.” This creates more stress on the demand side, further driving up prices. 

The result has been intense competition among customers, according to Makhlis. 

“We’ve had customers in the showroom betting against each other,” he said. “It’s awkward. It’s embarrassing. It’s uncomfortable. But that’s the world we live in”. 

What’s coming next

The recent price dip may be a temporary market correction, but it could also be a tangible result of auto dealers adapting to market conditions and getting creative with how they meet consumer demand. Makhlis’s dealership has been ramping up efforts to source used vehicles from the local community by encouraging residents of the surrounding area to sell their surplus cars. And some dealers have taken to reaching out to past customers to make buyback offers on the vehicles they previously sold to them. 

Many industry observers project that the auto chip shortage will last throughout 2022, but the gap between supply and demand for new cars is starting to narrow. Automakers have been ratcheting up production, as chip shortages begin to subside. U.S automotive inventories rose in November for the first time since fall 2020, leading to a 20% month-to-month increase in vehicle sales in January. Another positive sign is that monthly inflation for new vehicles dropped to 0% last month. An increase in availability of new cars (albeit a modest one) could explain why the used car market is beginning to show signs of stabilizing. 

While the downward price trajectory could herald a welcome return to market equilibrium, it's bad news for the 2 million people that have been buying a used car at an inflated price every month. Half of these purchases are financed with loans and a decline in used car prices would devalue the equity that underlies them. 

For those that were able to avoid the painful experience of buying a car in the past few months, however, the recent data is a cause for cautious optimism. Vehicle costs represent a major part of consumers’ budgets and auto loans make up 9% of all outstanding U.S household debt. A substantial drop in used car prices would reduce a major expense for millions of U.S consumers and could potentially increase consumer confidence, which is currently at its lowest point since 2012. This would give a much needed boost to consumers’ discretionary income and accelerate the economic recovery. 

About the Data:

Thinknum tracks companies using the information they post online, jobs, social and web traffic, product sales, and app ratings, and creates data sets that measure factors like hiring, revenue, and foot traffic. Data sets may not be fully comprehensive (they only account for what is available on the web), but they can be used to gauge performance factors like staffing and sales.

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