There will be no soft impact for the US used auto market. Prices for new and used vehicles have been a crucial driver of inflation. Demand has been heavy while supplies have been curbed by pandemic shutdowns.
Used car prices are now falling. The closely watched Manheim Used Vehicle Value index, which measures the wholesale market, slipped 2.3 per cent in September. The used car component of the US consumer price index has also declined recently.
Sharper signals emerged last week. In the second quarter, retail unit sales fell a steep 8.3 per cent versus 2021 on a like-for-like basis at CarMax. The big used car dealer blamed the shortfall on the higher day-to-day expenses consumers are dealing with. They are wary of buying big-ticket items. The company said sales results deteriorated markedly as the quarter progressed.
Within its wholesale segment, CarMax noted a depreciation per vehicle of $2,500. That drop was so fast it resembled falls in 2008-09. The results were shocking enough that the company’s shares crashed by nearly one-quarter, a loss of $3bn in market capitalisation.
The trends that benefited CarMax and its sector for two and half years are not just unwinding — they are doing so at alarming speed.
Still, used vehicles are hardly cheap. The Manheim index is nearly 50 per cent above its level three years ago. CarMax noted that even if whole depreciation per vehicle hit $2,500, appreciation in 2021 was $7,500.
The company is exposed to losses from buying cars in the market sold later at a markdown.
Car dealers play the role of banks via consumer finance arms that lend to buyers. CarMax said its average loan bore an interest rate above 9 per cent. Borrower delinquencies hit record lows in 2021. They have now started to return to historical levels.
There is a real chance Fed tightening will push the economy into recession. This would put a big strain on the affordability of cars and the creditworthiness of customers, even after sticker prices fall. Lower inflation has become a global imperative. Anyone seeking to sell a used car — dealers included — are feeling the consequences.