As regular readers know, I've followed vehicle sales as a major bellwether of the country's economic health for some years. Not too long ago, the expectation was that used car prices would show a massive decline, thanks to an oversupply of vehicles coming off lease, accompanied by so great an increase in the price of new vehicles that many people would no longer be able to afford them.
Over the past couple of months, that's changed. Bloomberg notes:
Distortions from the official CPI report can be seen in used-car pricing, which showed their biggest monthly jump in August since 1969, but are still far short of the increases seen by used-car auctioneer, Manheim, an Atlanta-based firm that sells roughly 7 million vehicles a year.
“The jump in used car and truck prices over the past two months might reflect the increased demand from city-dwellers who no longer are comfortable taking mass transit and others who have left the city and now need a vehicle,” said Kathy Bostjancic, economist at Oxford economics.
There's more at the link, including a larger version of the graph above.
That graph is really interesting. Officially, used vehicle prices are very stable; however, a leader in that field of business says they're anything but stable, having gone up by almost a third compared to the beginning of this year. What's going on?
Ms. Bostjancic's theory is probably correct, as far as it goes. Mass transit has been shown to be a hotpoint of infection for COVID-19, and it's also become a focal point for violence this summer, both criminal and politically motivated. As a result, many commuters are no longer comfortable with using it.
Also, there have indeed been many relocations from cities to outlying suburbs and smaller towns for health and other reasons. (I've seen figures suggesting that between half a million and one million households moved out of New York City this summer - and that's just one major metropolitan area.) I know that in places like NYC, many residents haven't bothered to own cars for a long time, because it's difficult, inconvenient and expensive to keep one there (for example, monthly parking fees in a secure facility can range from $300 to $1,000 per month). If they leave the city, and no longer have ready access to taxis or public transport, they need their own wheels.
However, there are several other factors that I think are playing a role. They include:
- With increased health risks, airlines cutting schedules due to reduced demand, and requirements for travelers to wear masks at all times (over and above the "normal" difficulties with TSA security theater, etc.), a lot of people are flatly refusing to fly. They'd rather drive to their destination.
- Thanks to restrictions on cruise ship sailings, hotel sanitation risks and quarantine requirements in some states, there's a boom in RV sales as families go on the road to vacation together - and travel trailers have to be towed.
- With more families staying at home as schools are closed, there's a greater need to ferry kids to and from outside activities - if only so that stay-at-home parents can retain their sanity!
- Restaurants in many parts of the country are severely restricted during the pandemic. Households have to shop for and prepare their own meals, on a scale that hasn't been needed for years, if not decades. There's also a greatly increased need for toilet paper, paper towels, and other domestic supplies now that so many more kids are learning at home. All those factors mean more shopping trips, and a need for larger and/or more reliable vehicles.
There's also the undeniable fact that new vehicle prices are ridiculously high. Added to that, there are greater restrictions on formerly-easy credit, as existing borrowers lose their jobs and lenders eye new applicants with increased wariness - they want to be as sure as possible that they can and will repay their loans. That means many buyers can no longer aspire to new cars, and are forced to turn to the used vehicle market to find something affordable. As always, greater demand pushes up prices.
Rental car companies, the largest buyers in the US car market, have also modified their purchase and resale patterns to adjust to the COVID-19 business environment. Previously, they'd buy hundreds of thousands of new vehicles every year, and sell a similar number of older ones on the used car market. When demand collapsed under the impact of the pandemic, some put a lot more of their vehicles up for sale to trim their fleets for the new business environment. The Hertz bankruptcy in particular dumped hundreds of thousands of vehicles into the market. That did initially depress prices; but the surge in demand, due to factors outlined above, rapidly absorbed the new supply of used vehicles, after which prices rose again. Meanwhile, the rental companies cut back drastically on their purchases of new vehicles, and kept older ones in service for longer (aided by the fact that their mileage wasn't increasing as fast as it usually did, thanks to lower demand from travelers). That hurt new vehicle sales, but shielded the used car market from an ongoing glut in supply, keeping prices higher.
Finally, I'm informed that many people who leased cars at attractive monthly rates over the past few years suddenly found that it was harder for them to qualify for new lease deals at affordable financing costs, thanks to tighter credit requirements during the COVID-19 economic downturn. However, they were often able to extend their existing leases for another year or two, usually at very attractive rates. Thus, many vehicles that would have come on the market in normal circumstances no longer did so, further reducing supply.
Put all that together, and the supply-and-demand equation makes for greatly increased used vehicle prices.