December 4, 2021

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Half the Automotive

Used-car prices are finally starting to fall from their pandemic peaks, but deals are still far away

A car dealership lot with Ram pickup trucks.

Used-car prices will only truly get back to normal once new-car prices come down. David Zalubowski/AP

  • Used-car prices have shot through the roof in the past year.

  • The market may have finally peaked and prices are slowly returning to normal.

  • But it could still be more than a year before you can truly get a deal on a secondhand vehicle.

  • See more stories on Insider’s business page.

In today’s topsy-turvy car market, people are shelling out thousands more for used cars than they did just a year ago, with prices jumping more than 10% in June alone.

And although prices appear to have peaked, it’ll be a long while before you’ll be able to pick up a secondhand set of wheels on the cheap, experts say.

Prices are finally dropping

After surging for months, wholesale used-vehicle prices went down between May and June, according to data from Manheim Auctions, the largest wholesale auto auction company. The prices dealers are paying only declined 1.3%, but experts say it signals that used-car prices are starting to descend back to Earth.

Retail prices typically lag about 3-4 weeks behind wholesale, so buyers should expect to see stickers on used car lots gradually declining in the next few months, Kayla Reynolds, an analyst at Cox Automotive, which owns Manheim, told Insider.

Still, the underlying factors heating up the secondhand market could drag on for at least a year or more.

A microchip shortage has kneecapped car manufacturing worldwide, choking the supply of new models and sending their prices through the roof. That, in turn, has forced many more people to shop used, pumping up the demand for secondhand cars and slashing dealer inventories.

Havoc in the new-car market also means that people have been holding onto their aging vehicles rather than trading them in. Rental-car companies, which typically purchase millions of new cars each year and provide a steady flow of lightly used vehicles, have resorted to buying up used cars, further tanking inventories.

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It all means that used cars – even old ones – are ridiculously expensive right now. A five-year-old vehicle now costs more than $24,000, up over $6,000 from a year ago, according to the automotive research outfit Edmunds. Some lightly used models are going for thousands more than their new counterparts because new cars are in such short supply.

It could be months before prices sink to normal levels

The chip shortage isn’t going away anytime soon, so it’s tough to say exactly when used prices will return to pre-pandemic levels.

JPMorgan estimates that the supply of new cars won’t fully normalize until mid-2022, keeping used prices historically high. Cox predicts that the chip issue will drag on until the beginning of 2023 at the earliest.

People in the market for a used car should wait at least six months if they want to avoid today’s absurd markups, says Ivan Drury, senior manager of insights at Edmunds. Holding off a purchase for a year is an even better idea for those who can swing it.

“Even in six months, you’re still going to be facing some type of slightly appreciated prices, just because there’s so much demand that’s going unfulfilled right now,” he said.

Even when the supply of new cars starts to recover, the used market won’t rebound overnight. The cycle of shipments to dealers, new purchases, trade-ins, and auctions will need to gradually pick up steam before consumers notice any major changes on the used side, Drury said.

Until bloated new-car prices come down, used values will stay inflated, he said. And buyers shouldn’t hold their breath for any blowout sales.

“[If] they’re waiting for inventory levels to get to the point where you actually have something like a ‘Summer Sell Down,’ or a ‘December to Remember,’ or any kind of clearance, that’s quite a ways away,” he said.

Read the original article on Business Insider