Used-car prices on the risePosted: October 2, 2009
Just nine months ago, Mike (“Mish”) Shedlock predicted that “Cars are going to get cheaper, much cheaper. Auto prices will crash…It makes no sense to buy a car now, no matter how good the deal looks. The deals will get progressively better as the year rolls on.”
Mish linked to numerous photos, such as this one, showing thousands of unsold cars sitting in ports:
According to this September 30, 2009, article in the Wall Street Journal, however, used-car prices are increasing, not decreasing:
Prices for second-hand cars took a hit late last year, along with the prices of many other assets. But since the start of this year, a combination of tight supplies of both new and used vehicles and higher demand from a frugal public have pushed average used-car prices to the highest levels in years, industry watchers say. Demand seems particularly strong for used SUVs, analysts say, reflecting lower gas prices.
That should be good news if you are selling or trading in a well-tended used vehicle over the next couple of years. It might not be so welcome if you are trying to buy one.
One widely followed measure of used-car prices, the 14-year-old Manheim Used Vehicle Value Index, will likely hit a record when data for September are released in early October, says Thomas Webb, chief economist for Manheim Consulting, a subsidiary of Cox Enterprises Inc.
Update (October 3, 2009): A reader asserts that the surge in used-car prices is due to two factors: (1) increased frugality among consumers, who can no longer afford new cars; and (2) the cash-for-clunkers program. Neither of these trends, my reader suggests, should be interpreted as signs of inflation. The Wall Street Journal article , however, attributes the decline in used-car prices to a reduction in the supply of new and used cars:
“What has happened over the last couple quarters is with supply being down, we’ve seen wholesale prices continue to appreciate. It’s just a basic supply-and-demand model,” CarMax President Tom Folliard said in a conference call…
The government financed “cash for clunkers” sales bonanza tilted the car industry’s supply-demand teeter-totter heavily toward the “demand” side, helping dealers to clear out new vehicles faster than they might have otherwise. But cash for clunkers isn’t the biggest reason why the value of your used vehicle could be going up. A bigger factor is millions of vehicles you can’t see—the ones car makers didn’t make, sell, lease or dump into rental-car fleets during the past year.
Big car makers had been slashing production—or shipments from overseas—to work down bulging inventories of unsold new vehicles that clogged dealer lots as the economy tumbled last year. Demand for many big vehicles—large SUVs, pickups and big cars—cratered in mid-to-late 2008 as gas prices surged. Detroit shut SUV factories right and left.
In short, there is less excess capacity than many observers had believed. Moreover, it’s worth noting that prices of new cars have increased since January 2009 (see Table A of this Bureau of Labor Statistics news release). This undercuts my reader’s implied claim that the increase in used-car prices reflects has come at the expense of new-car prices.
By the way, I am an admirer and long-time reader of Mish’s blog. He has been right far more than he has been on wrong. But when he predicted a “crash” in auto prices, he got it wrong. And, as we shall see, the automobile market is not the only sector showing signs of inflation.