Why Are Used Cars So Expensive Right Now?

Rising prices and interest rates have affected pretty much every industry, including used cars.

Used Doesn't Equal Cheap

The rising prices and interest rates are making it increasingly more difficult for people to afford used cars. Customer confidence has also taken a hit thanks to rising costs. CarMax reported on Thursday that its earnings plunged 54%. The number of cars they sold fell 6.4% compared to this time last year.

The company said that the cause for the drop in numbers was  “vehicle affordability challenges that stem from widespread inflationary pressures, as well as climbing interest rates and low consumer confidence.” Even though higher prices raised their revenue, the results still fell short of the forecasts from analysts. These results, in turn, spooked investors. CarMax shares dropped more than 24% on Thursday, and AutoNation fell 10%. Automakers like Tesla, General Motors, Ford, and Stellantis also fell,

Car prices have been rising steadily for the last two years. There were many factors that contributed to this, most notably part shortages like computer chips. Shortages in these types of items limited the supply of cars, but customer demand stayed the same. Higher vehicle prices have been a driving factor in overall inflationary pressure due to the fact that around 40% of households buy a car every year.

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Raise Interest Rates to Decrease Spending

In an attempt to curb inflation by decreasing consumer spending, the Fed has raised interest rates exponentially. Used car prices are up 48% from August 2019, and new car prices have gone up 30% in the last three years. CarMax reported that the average price of a vehicle is around $28,657 in the three months ending in August. These numbers show a 9.6% increase compared to last year, but 1% down from the previous quarter.

Dragging Sales

It's not just the cost of buying and financing the car that's putting a drag on sales, CarMax executives said. The overall pressure on household budgets from higher prices in other industries is also an increasing concern. “Groceries are higher than ever,” said CarMax CEO William Nash on a call with investors. “Consumer confidence, certainly during the quarter, all-time low as far as recent history, I mean even lower than the height of the pandemic. So I just think consumers are prioritizing their spend a little differently.”

The company's reserves were also crippled thanks to increased reserves to cover potential loan losses at its finance arm. CarMax has more than doubled the $35.5 million it held in reserve a year ago to around $75.5 million at the end of the previous quarter.

As new vehicles are produced and brought into the market, the price will eventually get driven back down. This will take time as facilities combat chip shortages and backed-up supply chains. Automotive experts expect the chip shortage will be resolved within the next year.

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This article was produced and syndicated by Wealth of Geeks.