Car shoppers on limited budgets can’t get a break. The average transaction price for new vehicles was expect to rise to a record $38,255 in May according to J.D. Power sending many consumers looking for bargains on used car lots. No such luck. The combination of high demand and high wholesale prices dealers pay to acquire inventory has led to record high prices for used vehicles.
“Depending on the data source, year-to-date wholesale prices have probably gone up 15% to 25%,” said Ernie Garcia, founder and CEO of used car sales online marketplace Carvana in an interview. “Prices have moved very dramatically. I’m not aware of any period in history where car prices have appreciated that quickly.”
In a report released on May 27, Jonathan Banks, vice president, Valuations Services at J.D. Power noted both wholesale and retail prices have been surging as demand for used cars and trucks increases due to thin new vehicle inventories caused by production interruptions as a result of a global semiconductor chip shortage.
“Wholesale prices increased at a rapid pace during the past 20 consecutive weeks and are up an unprecedented 37%, while used retail prices are 15% above where they were at the end of 2020,” wrote Banks. “Used-vehicle prices have shown no signs of softening and are expected to remain exceptionally strong for the foreseeable future.”
How strong? An analysis by Cox Automotive reveals the average listing price for used vehicles reached an all-time high in April at $22,568—the first time it’s ever crossed the $22,000 mark.
Toby Russell, co-CEO at online used vehicle marketplace Shift.com, told Forbes.com the surge in used vehicle demand is causing “bizarre, bizarre behavior in the form of used car prices appreciating.”
The “bizarre” pricing behavior to which Russell alluded not only refers to how much consumers are paying for used cars and trucks, but the desperation for inventory dealers are feeling.
Indeed, even vehicles Shift would never offer for sale are finding buyers at premium prices at wholesale auctions, according to Russell.
“We’ve been seeing things clear at 103%, 110% to MMR (Manheim Market Report)— cars that we bring in we would never sell that are damaged, like frame damage or need massive engine rebuild,” said Russell. “Normally we would lose a little money on that, but we’re making money on these because auction pricing is so intense and high. It’s just a total dislocation in the market caused by a surge in demand and lack of supply coming from new cars.”
That lack of supply in the face of strong demand will only lead to more pain for shoppers looking for both choice and affordability, according to Cox Automotive senior economist Charlie Chesbrough.
“Given the strong demand from consumers, and the tight supply situation, it seems likely that used-vehicle prices, already at all-time highs, will continue to rise,” wrote Chesbrough in a report released May 20. “At some point, prices will become too high, and demand will recede. But we are not there yet.”
There is a silver lining for those looking to trade in their current rides. Vehicles most in demand such as pickup trucks, crossovers and SUVs are bringing in top dollar.
“Today customers are getting much more money for a car than they would have likely received at for the same car the beginning of the year or in year’s past,” said Carvana’s Ernie Garcia.
Shift’s Toby Russell says the amount his site is paying for vehicles increased 25% over the first four months of the year.
“That’s like crazy,” he said. “Usually used cars will depreciate 1% per week but the car sitting in your driveway is likely to be worth 25-30% more than it was in January.”
Right now used car sales are still strong. At Carvana sales in the first quarter were up 28% over the final three months of 2020 according to Garcia.
But Cox Automotive’s Charlie Chesbrough warns that with the likelihood used vehicle inventories will grow even thinner over the next few months, it will be a pretty chilly summer at the dealerships, declaring, “folks can’t buy what isn’t there.”