What’s Happening In The Used Car Market Today
As it turns out, the global Covid-19 pandemic has done more than alter the health status of the nation’s people. Its effects have bled into the used car market, causing prices to sky-rocket reaching record-highs.
Previous to the pandemic, prices had dropped to recession-era level numbers. They then increased throughout the global illness and stabilized during the summer months. However, in the aftermath of the national health emergency, a shortage in parts made it difficult for dealers to find any new product to sell.
As a result, the rise in prices didn’t stop: “Wholesale used-vehicle prices rose 3.6% in the first 15 days of September over August prices, according to Manheim’s Used Vehicle Index”. In other words, the trend continued bringing prices in the used car market to today’s unfeasibly high numbers.
For example, Josh Frankel, a New York-based financial consultant obtained and leased a 2018 Jeep Compass. He found that on the used car market his vehicle was valued at $18,000. This made it worth almost $3,000 more than the lease buyout price.
The Schematics Behind Lease Prices
You might be wondering where car dealers get the numbers they do when calculating lease prices. It’s not all guesswork, rather an expert estimation of a vehicle’s residual value by the end of a lease. In other words, how much it will be worth after a driver has finished using it for the agreed-upon amount of time. This estimated value helps determine monthly payments as well as a lease buyout price.
Where They Went Wrong
Most of the time, and under normal conditions, lease calculations are fairly accurate. However, due to Covid-19 breakouts in Southeast Asia, specifically Malaysia, chip manufacturing production has taken an egregious hit. According to Michelle Krebs, a principal auto analyst with Cox Automotive, the global pandemic along with a semiconductor chip shortage created unprecedented circumstances: “Lease buyout prices were set three years ago when they never thought used car prices would be this high”.
For instance, Wes Grueninger, a mobile tech developer, leased a 2019 Honda Ridgeline. In June, the used car dealer Carvana, priced his vehicle at $36,400 while the lease buyout price from the dealership was only $29,000.
Further, the lack of chip manufacturing, or of any car part for that matter, has a domino effect. In other words, as the semiconductor shortage worsens, new car production decreases as well: “Forecaster IHS Market…slashed its light-vehicle production estimate for 2021 by 6.2% – more than 5 million vehicles – citing Malaysian outbreak and its impact on chip production”. According to an NBC article, the same vehicle production in 2022 is predicted to decrease by 9.3%.
When vehicle production becomes so limited, new car prices increase causing buyers to turn to used vehicles. This high demand causes many wholesalers to follow suit with increased price tags, knowing consumers will pay it as their options are severely limited.
The Future Of Used Car Prices
According to Manheim’s Used Vehicle Value Index, in the latest market jump, prices are 24.9% above those in September of 2020. Furthermore, they are 41.9% above those in March of 2020. Note that Manheim is one of the world’s largest wholesalers of used vehicles. Consequently, their index holds both authority and legitimacy within the market. According to key indicators, analyzed both by Manheim and other experts, the current high price trend shows no signs of stopping any time soon.