Wholesale prices of used vehicles fall, but not retail prices; they’re still in ridiculous territory

The buyers’ strike is in effect. Declining retail sales of pre-owned vehicles, dealers sing the blues but don’t want to cut prices from their ridiculous levels.

By wolf richter For wolf street,

The thing about used vehicle prices is that wholesale prices at auction have fallen throughout the year, and have fallen again in October, and that’s where dealers buy a large portion of their inventory.

But the retail prices of used vehicles have not come down, even as retail sales decline in 2021 and 2020 amid buyers’ strike following absurd price hikes. And there’s pressure on dealers to cut prices, and dealers are talking about this environment for sales. But they’re still trying to keep these ridiculous retail prices around for as long as possible.

Wholesale prices of used vehicles have come down 2.2% in September to October, 16% from the peak in December and January, and 10.6% year-on-year, a year-on-year decline since May 2020, according to data from Mannheim, the largest auto auction house in the US and a unit of Cox Automotive, Despite the recent decline, the index is still up 24% compared to October 2020, which shows how ridiculous the price increase has been.

Wholesale price reflects input cost for dealers, The cost of newly purchased inventory has been falling throughout the year. And usually, businesses don’t complain when their input prices drop.

But any vehicles that had been sitting with them for a while were bought at the higher prices that were effective at the time, and that’s a problem for dealers.

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

In 2020 and 2021, dealers are eyeing whatever buyers are suddenly willing to pay, even paying more for a used vehicle than an equivalent new vehicle, If any It had the special effect of getting paid for whatever it was because of the torrent of free money on everything and everyone since the spring of 2020.

No reduction in “average listing price” at dealers this year. At $28,237 in September, according to Cox Automotive, it was largely unchanged from December (it will release October data in a few days). It refers to the average price at which dealers advertise their retail units.

In the 17-month period from August 2020 to December 2021, the average listing price increased by a ridiculous 41% as dealers foamed at the mouth of buyers’ sudden willingness to pay, and they bid up prices at auction . Ridiculous levels, knowing that they still make historic gross profits by selling those vehicles at even higher prices to retail customers who are suddenly willing to pay anything.

This frenzy peaked in December and January. But listing prices haven’t come down since:

The consumer price index for used vehicles hasn’t dropped either, But has been teetering in ridiculous territory since February. In September, it was still up 7.2% year-over-year, and up 34% from September 2020, how ridiculous was this whole spike.

But there has never been a shortage of used vehicles to justify the absurd price hike, In February 2020, before the pandemic distortions, dealers had 2.95 million used vehicles in inventory. In the early months of the pandemic, inventory fell, but never into the “shortage” category, and has since recovered substantially. 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 for a year or three with what they already own. But buyers were suddenly willing to pay whatever – that’s when the inflationary mindset kicked in. The entire industry picked up the ball and ran with it, and ran as fast and as far as they could. The run ended late last year in ridiculous territory.

Demand has fallen at these prices for two reasons: one, the prices are ridiculous and no one should be buying a used vehicle at those prices; And two, interest rates have skyrocketed for the purchase of used vehicles, making those ridiculous prices even more expensive. just say no?

A sharp fall in retail prices to less ridiculous levels will spur demand. But falling retail prices is the last thing dealers would want. But it will definitely boost sales.

supply has returned to normal And it ticked up to 50 days in September, which was the year before the pandemic saw sales decline:

Used vehicle dealers singing the blues.

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

Despite the drop in sales, CarMax reported that the average retail selling price increased 9.6% to $28,657 per vehicle.

Its retail unit’s gross profit rose to $2,282 per vehicle, “an increase of $97 per unit despite a declining market,” it said in its earnings report.

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

That was through August, and retail pricing conditions remain tough, and CarMax shares are down 59% since peak-mania-November 2021.

But the people at CarMax are the adults in the room; They have gone through the turning market many times before. And he still made money.

The same can’t be said for Carvana, which is the largest pure-online used vehicle dealer. Similar to CarMax, it reported an 8% decline in retail sales of used vehicles, but its gross profit per unit fell 25%, its expenses jumped and its net loss skyrocketed to $508 million. Its shares plunged 39% on Friday following its disastrous earnings report, and are down 15.8% today to close at $7.39. Fell down 98% from peak in August 2021,

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