A recent Automotive News report states that the used vehicle market will experience a drop in 2022 extending to 2023. Using analysis and data from KPMG, a popular consulting firm, the predicted decline in average used car prices is about 20-30% in return to a steady relationship to new car prices.
This is, however, dependent on vehicle supply, which the firm believes will hit equilibrium around October and head into 2023.
Whether it goes until the end of 2022 before new car supply adequately satisfies the demands, KPMG state the used car prices may take a fall before this. According to its predictions, KPMG foresees the market anticipating an enormous new car supply and declining used car prices to follow.
Analysts believe that this dip will be a significant one. Currently, the average used car prices are approximately 42 % over the 2020 process. This is one massive swing up, and suppose it drops; it will be massively impactful.
Owners who paid for their used cars during the Covid period prices will have enormously overpaid for their models’ current value and might quickly see their investment tank, which will genuinely leave a mark.
Several other renowned analysts like Cox Automotive have also shared their reports. For instance, the firm mentioned above suggests that the decline in used car prices will be gradual and more manageable- it doesn’t foresee the market hitting pre-pandemic supply until early 2025.
Cox also predicts that the used car price peak will happen between the start of 2022 to April but gradually slow down afterwards.
KPMG offers several possible scenario alternatives to its initial prediction. The suggestion is that inflation continues leading to prices staying high indefinitely.
The other introduces the possibility that depending on the Federal Reserve approach to inflation could result in a snap-back effect and ultimately reduce consumer demand.
Wholesale vs retail price: which is most affected by the dip?
It is worth noting that there is two prices for used cars; retail and wholesale price. Wholesale prices represent the costs dealers must pay for inventory, while retail prices define what customers pay at a dealership.
Wholesale (used car) prices.
According to black book’s figures, the wholesale prices for used cars surged upwards by 50%| in 2021, with the retail prices only increased by around 35%. Ideally, there is an apparent and integral relationship between retail and wholesale prices. Retail prices, however, by a substantial margin to wholesale prices.
The trend shows that wholesale car prices are plateauing, which is positive. Alternatively, retail prices are expected to continue rising over the years.
One of the reasons for this is that dealers who purchased used cars during the inflation period will hold on to their vehicles until they identify a suitable retail customer.
Before the market boom, dealers would have shown more interest in turning their inventories to mitigate the vehicles’ interest costs. Nonetheless, since the current interest rates are significantly low, this won’t be a motivating factor.
Retail (used car) prices.
Unlike wholesale used car prices, retail prices will soar high and continue rising, particularly in early 2022, considering the coming tax season. Also, it is expected that wholesale prices will also increase, albeit less rapidly, within the same period.
There is a high consumer availability to credit. The Federal Reserve’s recent survey outlined that several financial institutions eased their lending standards.
The expectation is that consumers will continue having easy access to financing for motor vehicle purchase needs. Moreover, this will mean that retail prices remain high because dealers will have more and easier access for their clients that offer them a regular monthly payment.
In the ‘spring sales season,’ the market will continue to experience increases in average used car prices. However, we expect to witness a gradual decline in retail and wholesale prices during the summer.
Fall of 2022 promises a notable drop in car prices.
The KPMG report outlines that after assessing the motor vehicle industry, the 2022 fall season represents perhaps the most likely period when used car prices will drop.
Typically, fall and winter periods are notably the months when used car prices depreciate most. Considering this seasonality and surges in new car production, potential interest rate increases will ultimately push used car prices downwards.
Even so, this scenario does not consider the impact of potential government incentives on electric car costs. Although Congress has yet to pass a specific amendment bill containing 2022 EV tax credits, there is a significant likelihood it will pass.
The proposed tax credits would massively increase used and new vehicle demand, and if it does happen, it would likely offset the plugin used car prices. What’s more, numerous questions are surrounding new vehicle production.
Although automotive manufacturers like Toyota have given press releases confirming they have overcome their worst manufacturing issues, we can only wait and see the validity of their claims.
