Used Vehicle Wholesale Prices Drop, But Not Retail Prices; They’re Still in the Ridiculous Zone

The buyer’s strike is in force. Retail sales of used vehicles, dealers sing the blues but don’t want to drop prices from their ridiculous levels.

by Wolf Richter to WOLF WAY.

The thing about used car prices is that wholesale prices at auctions have plunged throughout the year, and dropped again in October, and this is where dealers buy a large portion of their inventory.

But the retail price of used vehicles is not falling, even as retail sales fall amid a buyer strike following ridiculous price spikes in 2021 and 2020. And there is pressure on dealers to cut prices, and dealers are upset about this environment and down. sales. But they keep furiously trying to hold on to these ridiculous retail prices for as long as they can.

The wholesale price of used vehicles is down by 2.2% in October from September, by 16% from the peak in December and January, and by 10.6% year-to-year, the first year-over-year decline since May 2020, according to data from Manheim, the largest car. auction house in the US and one unit Cox Automotive. Compared to October 2020, despite the recent decline, the index rose by 24%, which shows how ridiculous the price increase is.

Wholesale prices represent input costs for dealers. The cost of newly purchased inventory has decreased throughout the year. And generally, businesses don’t complain when their input prices drop.

But whatever vehicle they’re sitting on is temporarily bought at a higher price that’s effective at the time, and that’s a problem for dealers.

And since these input costs fall for all dealers, price competition eventually has an effect on the retail prices that dealers charge, but the dealers are furious trying to hold the line.

In 2020 and 2021, dealers have seen buyers suddenly willing to pay anything, even more for a used vehicle than an equivalent new vehicle, if at all. This special effect is paid-for in part because of the free flow of money that has been raining down on everyone and everything since the spring of 2020.

“Average list price” at dealers has not been budgeted this year. At $28,237 in September, it was roughly unchanged from December, according to Cox Automotive (it will release October data in a few days). This represents the average price at which dealers advertise their retail units.

During the 17-month period from August 2020 to December 2021, the average list price jumped by a ridiculous 41%, as dealers are foaming at the mouth about the willingness of buyers to suddenly pay what, and they bid up the price at the auction to a ridiculous level, knowing that they are still making historic gross profits by selling those vehicles at even higher prices to retail customers suddenly willing to pay anything.

This mania peaks in December and January. But the list price hasn’t dropped since then:

The Consumer Price Index for used vehicles also did not decline, but has been wobbling along in the ridiculous zone since February. In September, it was still up by 7.2% year-on-year, and by 34% from September 2020, that’s how ridiculous the whole spike is.

But there is never a shortage of used vehicles to justify the ridiculous price hike. In February 2020 before the pandemic distortion, there were 2.95 million used vehicles in inventory at dealerships. In the early months of the pandemic, inventories fell, but never into the “shortage” range, and then largely recovered. So far this year, inventory has been in the 2.46 million range, according to data from Cox Automotive:

Vehicles are discretionary purchases: Most people can easily drive what they have for another or three years. But buyers are suddenly willing to pay anything – that’s when the inflationary mindset begins. The entire industry picked up the ball and ran with it, and they ran as fast and as far as they could. Run ended at the end of last year in the ridiculous zone.

Demand at this price has fallen for two reasons: One, the price is just ridiculous and no one should buy a used vehicle at that price; and two, interest rates to finance used vehicle purchases have jumped, making those ridiculous prices even more expensive. Just say no?

A sharp drop in retail prices to less ridiculous levels will boost demand. But falling retail prices is the last thing dealers will want. But it will definitely increase sales.

The supply is back to normal and ticked up to 50 days in September, where it was before the pandemic, given the drop in sales this year:

used vehicle dealers to sing the blues.

CarMax, the largest used car dealer in the US, said in its last earnings report that in the quarter through August 31, comparable-store retail sales of used vehicles, in terms of the number of units sold, decreased by 8.3% from a year ago. in the past; and total unit retail sales decreased by 6.4%.

Despite the sales decline, CarMax reported that the average retail selling price rose 9.6% to $28,657 per vehicle sold.

Retail unit gross profit rose to $2,282 per vehicle, “an increase of $97 per unit despite steep market depreciation,” as stated in the earnings report.

This higher gross profit reflects any dynamics in the selling price and the decrease in the cost of vehicles purchased in the wholesale market. Its net income fell by 56% to $126 million.

It’s through August, and retail price conditions remain tough, with CarMax shares already down 59% from their peak-mania-November 2021.

But the folks at CarMax are the adults in the room; they have been through the market many times before. And they still make money.

That can’t be said for Carvana, the largest pure-online vehicle dealer. Similar to CarMax, it reported an 8% decrease in the number of used vehicles sold at retail, but gross profit per unit fell 25%, costs jumped, and the net loss rose to $508 million. Its stock plunged by 39% on Friday, following its catastrophic earnings report, and is now down another 15.8% today, closing at $7.39. has fallen by 98% from the peak in August 2021.

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