After more than a year of sharp, steady increases, used car prices started falling in the late summer of 2022. The drop in prices has already had wide-reaching effects around the auto industry, but a difficult supply chain situation and higher interest rates makes it hard to predict what that drop could mean for the average car buyer.
Used Car Prices are Falling Fast – At the Wholesale Level
Rapidly falling used car prices may be the headline, but the reported drop is based mainly on the wholesale prices of used vehicles.
According to the Manheim Used Vehicle Index – a proprietary metric that accounts for average pricing of vehicles, taking into account differences in make, model, body type, model year, and mileage – the wholesale price of used cars reached its peak at the end of 2021. The index fell slightly during the first quarter of 2022 before leveling out for a few months.
After July of 2022, wholesale used car prices started to see a more severe drop. Between July and August, the Manheim Index fell more than 4%, a rate that has roughly continued since. The October index of 200 marks a 15% decrease from its January peak of 236.3.
Dropping Price Percentage Varies by Vehicle Type
The average drop in used car prices year-on-year from October 2021 to October 2022 was 10.6%, according to the latest Manheim report. However, the decrease in used vehicle prices varied between different types of cars.
Luxury vehicles saw the biggest drop among all vehicle types, with prices falling 13.6%. The next category of vehicles was SUVs and crossovers (CUVs), which saw prices fall 12.4%. Compact cars saw the smallest decrease, with prices falling 6.1% over the last year.
Why Are Used Car Prices Dropping?
A major reason that used car prices were previously so high is supply issues. Since the beginning of the pandemic, the chip shortage and other supply chain issues reduced the supply of new vehicles, resulting in increased demand for used vehicles.
With those issues showing signs of easing, the supply of used cars has begun to increase. According to one report from Kelley Blue Book (KBB), used car inventory sat at 2.46 million nationwide at the end of August. This roughly matched the inventory from a month earlier, signaling a greater supply of used vehicles compared to previous months.
Chris Frey, Cox Automotive’s senior manager for Industry Insights, spoke to KBB about the change in used car supply, saying, “Inventory volume at the end of August was 10% above year-ago levels, so we’re seeing some improvement.”
Lower Wholesale Prices Aren’t Necessarily Making Used Cars More Affordable
While used car prices are falling for wholesalers, that doesn’t necessarily translate to more-affordable vehicles for individual car buyers. Car dealers may pay less for used vehicles, but that doesn’t mean they’ll lower their asking prices. Despite the latest drop in wholesale prices, retail prices for used cars are still 7.2% higher than the same time last year, according to data from the Bureau of Labor Statistics (BLS).
Even if retail prices eventually drop along with wholesale price trends, other factors mean that used cars are less affordable now than they have been.
Rising Interest Rates Can Counteract Falling Used Car Prices
The Federal Reserve issued a series of rate hikes to the federal funds rate beginning in March in an attempt to counter inflation. At the beginning of 2022, the federal funds rate sat at around 0%. After six rate hikes, it now sits at 3.75% to 4.0%. This has resulted in a dramatic increase in auto loan rates, both for used and new vehicles.
According to industry data, the average rate for a 60-month loan on a new car jumped from 3.85% in January, 2022 to 5.16% in September. More recent data for used car loan rates was not available at the time of publication.
This 34% increase in the average interest rate represents a difference that can change the affordability equation for some buyers. According to a report from the National Automobile Dealers Association (NADA), the average transaction price for a used car in September 2022 was $31,025. Using this as an example, we can see how the increase in interest rates changes the total price and monthly payments for a vehicle.
Purchase Price Interest Rate Monthly Payment Total Cost Interest Cost $31,025 3.85% $569.27 $34,156.49 $3,131.49 $31,025 5.16% $587.76 $35,265.42 $4,240.42 *This model assumes 100% financing, excludes taxes and fees, and is meant to be used as an example only. Auto loan rates vary greatly by credit score and many other factors.
This difference in total cost and monthly payments can be even greater when it comes to used car loans, as these may vary much more than loans for new vehicles. The cost difference between loan rates is also exacerbated when borrowers take on longer loan terms, which has become a trend in recent years.
Inflation Has Decreased Overall Affordability For Many Car Buyers
The Federal Reserve’s rate increases were implemented to try and tame runaway inflation. While, according to BLS data, the rate of inflation has slowed – the consumer price index (CPI) rose by only 0.4% in October – the CPI is still 7.7% higher than a year ago across major categories.
The rising costs of living have not coincided with higher wages, which have not seen a meaningful increase over the same period of time. This means that workers are spending a larger portion of their income on goods and services, leaving less room in the budget for car payments and increasing the challenge of saving for a down payment.
Rising Interest Rates Can Result in Higher Debt Payments
The increase to the federal funds rate hasn’t just resulted in higher interest rates for auto loans. According to data from Bankrate, the national average annual percentage rate (APR) for credit cards increased by 2.74% in 2022. This means borrowers are effectively paying more towards credit card debt overall and are likely to have higher monthly payment requirements.