The reopening of the U.S. economy and nagging pandemic supply shortages are driving prices in the used car market to infinity and beyond.
Some lenders are cashing in big on defaulted auto loans as high demand turns the auto-lending world upside down.
Second-hand vehicles sold for an average of 40 percent more in June than they did early in the pandemic in February 2020, according to data from JPMorgan.
Fewer borrowers are underwater on their car loans, meaning fewer owe more than the car is worth when they trade it in.
Due to the acute shortage of vehicles to sell, cars are acting more like houses, growing in value and delivering good profits to their owners. The average price of a second-hand car was $18,453 in June, up more than 34 percent from the same time last year, according to Manheim Inc.
“The hopeful prospect for shoppers is that even though prices are higher, your trade-in will never be worth more than it is today, and this may put you in a position to purchase a newer car,” said Lauren Donald, a senior director of accounts at PureCars.
Here are five things to know about the hot used car market.
A historic shortage of cars combined with shoppers’ indulgence has made used car values take off by nearly 30 percent since June 2020, according to Edmunds automotive research.
Over the last six months, Johnson’s Magic City Auto Group In Virginia reported raising prices consistently, and the buyers just keep walking in.
“I’ve definitely never seen this. And I think if you had a group of the brightest people in a room a year ago, no one would have predicted this,” said Cameron Johnson, a fourth-generation car dealer with nine franchises in Virginia.
Chips control everything on a car from window motors to infotainment screens. The shortage of microchips is slowing car production across the world, choking the supply of new models and driving their prices up.
The chip supply problem is worsened by a year’s worth of suppressed demand from people who started to venture out again after being locked down when the worst days of the pandemic appeared to be over, said Nick Woolard, lead industry analyst at auto pricing platform TrueCar.
New-car inventories in the U.S. were down 54 percent in June compared to the same month in 2019, according to Cox Automotive, whose auto businesses include Kelley Blue Book and Manheim.
The new car supply is expected to get tighter over the next few months and this will increase the demand for used cars. The market could simmer down eventually but it will take some time.
“If you need a car right now, they are expensive, and unfortunately all signs show that prices will continue to increase,” said Nick Woolard, an analyst at TrueCar. “This a great time to trade in a car or sell a used vehicle because used vehicles are going up in value — something that doesn’t happen that often.”
Popular models are so expensive that consumers have become less choosy and take on vehicles they would not have considered before.
For example, some shoppers who would not have looked for a lifted pickup ended up buying one since they could not get the model they were looking for, according to Chad Staples, director of Arizona-based Lifted Trucks.
Vehicles that may have been on the shelf before because of odd job paints such as orange, luminous green, bright yellow or Tiffany blue are now selling, Staples added.
There is some good news. Prices seem to heading back to where they were before. Wholesale used car prices — the amount that car dealers pay for cars — fell in the first two weeks of July.
Retail prices are expected to follow soon, probably over the coming weeks, and buyers will start to notice a drop in car prices.
There are already signs that the market is leveling off, with prices dropping by as much as $2,000 for a used car over the course of July as the supply of new cars starts to increase.
“New car inventories are going to get better continuously over the next few months as we get towards the end of the year,” said Jeff Dyke, president of Sonic Automotive, which operates 100 U.S. dealerships.
“This will ease the amount of inventory issues that are happening on pre-owned side,” Dyke said in a CNBC “Worldwide Exchange” interview.
However, getting all the way back to normal will still take a long time, said Charlie Chesbrough, a senior economist at Cox Automotive.