Used

Jul 11, 2023

The thing about used-vehicle prices is that wholesale prices at auction have plunged all year, and dropped again in October, and this is where dealers buy a big portion of their inventory.

But retail prices of used vehicles haven't dropped, even as retail sales declined amid a buyers’ strike following the ridiculous price spikes in 2021 and 2020. And there is pressure on dealers to cut prices, and dealers are bitching about this environment and dropping sales. But they’re still furiously trying to hold up these ridiculous retail prices for as long as they can.

Used vehicle wholesale prices dropped by 2.2% in October from September, by 16% from the peak in December and January, and by 10.6% year-over-year, the first year-over-year decline since May 2020, according to data from Manheim, the largest auto auction house in the US and a unit of Cox Automotive. Compared to October 2020, despite the recent drop, the index is still up by 24%, which shows how ridiculous the price spike has been.

Wholesale prices reflect input costs for dealers. The cost of newly purchased inventory has been dropping all year. And generally, businesses don't complain when their input prices drop.

But whatever vehicles they had sitting on the lot for a while were purchased at the higher prices effective at the time, and that's a problem for dealers.

And since these input costs are dropping for all dealers, price competition will eventually have an effect on retail prices that dealers charge, but dealers are furiously trying to hold the line.

In 2020 and 2021, dealers had been starry-eyed over the buyers’ sudden willingness to pay whatever, even paying more for a used vehicle than an equivalent new vehicle would have cost, if there had been any. This special effect of paying-whatever was in part due to the torrent of free money that was raining down on everything and everybody since the spring of 2020.

The "average listing price" at dealers hasn't budged this year. At $28,237 in September, it was roughly unchanged from December, according to Cox Automotive (it will release the October data in a few days). This reflects the average price at which dealers advertise their retail units.

Over the 17-month period from August 2020 through December 2021, the average listing price jumped by a ridiculous 41%, as dealers were foaming at the mouth over the buyers’ sudden willingness to pay whatever, and they were bidding up prices at auctions to ridiculous levels, knowing that they still make historic gross profits by selling those vehicles at even higher prices to retail customers suddenly willing to pay whatever.

This mania peaked in December and January. But listing prices just haven't come down since then:

The Consumer Price Index for used vehicles hasn't dropped either, but has been wobbling along in the ridiculous zone since February. In September, it was still up by 7.2% year-over-year, and by 34% from September 2020, that's how ridiculous the whole spike was.

But there has never been a shortage of used vehicles to justify the ridiculous price spike. In February 2020 before the distortions of the pandemic, there were 2.95 million used vehicles in inventory at dealers. In the early months of the pandemic, inventory dropped, but never into the "shortage" range, and it 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 already have for another year or three. But buyers were suddenly willing to pay whatever – which is when the inflationary mindset kicked off. The entire industry picked up the ball and ran with it, and they ran as fast and as far as they could. The run ended at the end of last year in the ridiculous zone.

Demand at these prices has fallen for two reasons: One, the prices are just ridiculous and no one should buy a used vehicle at those prices; 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 would boost demand. But falling retail prices is the last thing dealers would want. But it sure would perk up sales.

Supply is back to normal and ticked up to 50 days in September, which is where it had been before the pandemic, given the decline in sales this year:

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

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

The gross profit her retail unit rose to $2,282 per vehicle, "an increase of $97 per unit despite steep market depreciation," as it said in its earnings report.

This higher gross profit reflects whatever dynamics in selling prices and the dropping costs of the vehicles it purchased in the wholesale market. Its net income fell by 56% to $126 million.

That was through August, and the retail pricing situation has remained tough, and shares of CarMax have plunged by 59% from peak-mania-November 2021.

But the folks at CarMax are the adults in the room; they’ve been through a turning market many times before. And they still made money.

That cannot be said for Carvana, the largest pure-online used vehicle dealer. Similar to CarMax, it reported an 8% drop in the number of used vehicles it sold retail, but its gross profit per unit plunged by 25%, its expenses jumped, and its net loss skyrocketed to $508 million. Its shares plunged by 39% on Friday, following its catastrophic earnings report, and today are down another 15.8% today, closing at $7.39, having collapsed by 98% from the peak in August 2021.

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