It’s Not Just the Chip Shortage Causing
Used Car Prices to Skyrocket
Used cars have hit the perfect storm for soaring prices—
but how did this storm get created?
BY WESLEY WREN AND KEENAN THOMPSON
JUN 29, 2021
- Used car prices have risen dramatically because of a shortage of available new cars and a general increase in car demand.
- Prices are expected to stabilize in the fall, but the computer chip shortage will play a role in the prices normalizing.
- Decreased supply in fleet sales, repossessions, and off-lease cars entering the used market is shrinking the supply.
If you’ve been shopping for a used car lately, you’ve probably been knocked into the Twilight Zone. Used car prices have climbed to unheard of levels, in some cases surpassing the vehicle’s original MSRP, which has effectively turned vehicles into an appreciating asset. This, by and large, is not normal.
. . .
Repossessions and fleet cars not reentering the market are having a huge effect on the used car price, but again, they’re not the only reasons for the decreased supply. President of the auction powerhouse ADESA, John Hammer, explains: “When we think about commercial inventory, the main supply channels for that really come from off-lease, repos, rental fleets, and then just other fleet customers. But off-lease cars, we have 80 percent of the supply actually flow through our platform, so we have really good insight into what’s going on the off-lease side. But prices have gone up so much in the market, there’s so much demand for those low-mileage cars, that they’re either getting bought by the customer or getting bought by a dealer before they’re even entering the remarketing channels and have an opportunity to go through the auctions.”
Hammer also touches on some of the supply issues as mentioned by Black Book’s analyst. “All of the stimulus money with government, it’s good for consumers, has really kept those cars out of the lanes. Repo rates are really low. We kind of expected repo rates to spike, but it really hasn’t happened,” says Hammer.
While this increased demand in used cars should increase the price of cars, it’s hard to believe that cars are becoming appreciating assets. “Normally what happens, though, is prices are somewhat capped by new cars,” says Hammer. “So you’ll see used car prices rise and rise, and eventually, they’ll just kind of cap out because they get so close to new car prices that people switch over to buying new cars. But with the new car inventory being so short due to the chip issue, new car prices are rising as well. Our economist tells us ‘it’s the perfect storm meeting the perfect drought.’ There’s a ton of demand and there are just not enough cars out there.”
. . .
Now that we know why we’re seeing the used car market go wild, we should take a look at how it’s actually affecting the movers and shakers—those who are passing those extra costs onto the consumer. The used car dealer is also fighting for inventory, as Hammer explains, “When cars do get in the lane, the dealers are fighting over them. So prices are as high as we’ve seen them. Dealers are shopping further away than they ever did. Bids are up substantially, nearly double per vehicle what we’ve seen in the past… dealers buying out of state is up almost double.”
To view the full article on Autoweek, click here.