The prices for used cars are finally going down. Actually, they’re falling off a cliff. Yet the prices they’re charging are at their highest rate in years. So what’s going on, besides the obvious that dealers are taking every opportunity they can to charge customers more?
Let’s look at how much used wholesale car prices are dropping. In September, they fell by only two percent. But by October, they had fallen by over 10 percent, according to the Manheim Used Vehicle Index. Manheim is one of the largest wholesale car buyers and sellers in the U.S.
How much have used car sales dropped?
But some segments fell more than 10 percent. Wholesale prices for SUVs fell over 12 percent, with luxury cars dropping 13.5 percent. Trucks, the darling of the car market, fell 8.4 percent. And here’s the rub, retail prices increased 7.2 percent year over year according to the Labor Department’s consumer price index.
So what we’re seeing is that there is a larger price gap between what car dealers buy and sell cars at. And that means that rather than passing the lower wholesale price onto customers, dealers are just pocketing it. There’s nothing wrong with a business making more profit, but if buyers are aware of the facts, there is also nothing wrong with not making a purchase right now.
Is inflation driving car prices up or down?
“If a dealer paid $5,000 for a car that today would sell for $4,500 in the wholesale market, they probably will still look to get a price that compensates them for the $5,000 they paid,” Economist Dean Baker told The Hill. “That might mean there is a month or two for prices in the retail market to adjust to prices in the wholesale market.”
Because the feds are raising interest rates to lower inflation, this scenario won’t last. Raising interest rates on borrowed money lowers demand. If nobody is buying at the price cars are being offered at, dealers know they must lower the asking price. So right now, that adjustment hasn’t kicked in yet.
When will dealers start dropping prices?
But it will. A dealership doesn’t want vehicles sitting on its lot for very long. Costs begin to mount to maintain the car. Cars purchased through a rolling line of credit means interest is adding up. And dealers need to keep money moving to keep business moving.
“In the United States, we have a demand issue,” Federal Reserve Chair Jerome Powell said during a press conference last week. “We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So, our tools are well suited to work on that problem.”
The bottom line is that demand for vehicles is falling. That means prices will start doing the same so that dealers can “move the metal.” Hold off on buying a used car until you see prices that more comfortably fit your budget. Those cars a bit out-of-reach right now might soon be attainable in a couple of months.