Are these crazy used-vehicle prices finally triggering some resistance among buyers?
By Wolf Richter for WOLF STREET.
When are potential buyers of used vehicles finally burned out on paying these ridiculous prices? When is price resistance finally setting in? When are people finally going on buyers’ strike so that prices would have to come down from that ridiculous spike? Buying a car is for most people a discretionary purchase: They could easily drive their trade-in another year or two; they don’t have to buy a car now, unlike groceries. Buyers can pull back, which they proved during the Great Recession.
And in June, July, and August, it seemed we had the tepid beginnings of some sort of price resistance when used vehicle wholesale prices dipped a little; and with a lag, retail prices dipped a little. But then the whole thing exploded again.
In December, the ridiculous spike in wholesale prices, tracked by the Manheim Used Vehicle Value Index, rose another 1.6%, and was up 47% from a year ago. Manheim, the largest auto auction operator in the US, pointed out that the underlying dynamics that already started to shift at the end of November, shifted further by the end of December, when sales declined and supply jumped again, and was sharply above average. This ridiculous spike looks to be getting ready to turn the other way:
Compared to two years ago, before this craziness kicked in, the Manheim Used Vehicle Value Index spiked by 67.4%, which is of course utter craziness:
Prices in the Manheim Used Vehicle Value Index are adjusted for the mix of models and mileage, and for seasonal factors.
Typically, non-adjusted used vehicle prices drop in the second half of the year. And in December, the non-adjusted average declined by 1.1% from November and was up by 43.4% year-over-year, according to Manheim.
The chart below is from the Q4 presentation by Cox Automotive (which owns Manheim) on Friday January 7. It shows the percentage changes of non-adjusted prices of 3-year-old models per year. In each year, prices declined in the second half – except in 2021 (red line at the top), when prices of 3-year-old vehicles exploded until week 46.
The chart also shows the peculiar price movements in 2020 of 3-year-old vehicles (purple line, second from the top), with prices falling through week 18 (lockdowns) then surging to set new records. But even in 2020, on this non-adjusted basis, prices declined in the second half (click on the chart to enlarge):
The average daily sales conversion rate at the Manheim auctions declined in December to 53%, “close to normal for the time of year,” and compares to a conversion rate of 52% in December 2019, according to Manheim. “This indicates that the month saw balance between buyers and sellers, and as a result most vehicles showed price depreciation,” it said.
Retail sales in December down year-over-year.
Used vehicle retail sales in December – sales on dealer lots – at a seasonally adjusted annual rate of 20.4 million vehicles, flat for the month, fell 5.5% from December 2020.
The year-over-year decline in sales is not due to lack of inventory for sale. That’s for sure. There was suddenly plenty of supply.
Supply in December balloons to above average levels.
Supply of used vehicles on dealer lots at the end of December jumped to 54 days’ supply at the December rate of sales: 10 days, or 23% above the average of 44 days. It was the second month in a row with above-average retail supply; in November, supply had jumped to 49 days, from 39 days in October.
Supply at wholesale auctions at the end of December jumped to 33 days, also 10 days above the average of 23 days. This too was the second month in a row with above average supply: In November, wholesale supply had jumped to 29 days, from 18 days in October.
Price resistance might finally set in.
I’ve been fooled by the hope that price resistance would finally kick in when in June, July, and August, the crazy wholesale price spike started to unwind a tiny wee bit, only to watch it with utter astonishment as it exploded higher in the following months.
But now supply ballooned to above normal levels, and retail sales dropped year-over-year, and the dynamics are saying that the WTF price spike has gone as far as the market will bear. I don’t expect prices to collapse to anything close to 2020 levels – prices of consumer durable goods are sticky, unlike commodities. But if volume continues to drop, and dealers are sitting on inventory, then they’ll be more eager to make deals with their retail customers, and they’ll be more prudent in bidding up prices at the auctions – and we should start seeing that over the next few months.
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