Economic Uncertainty, Higher Interest Rates Curb Demand For Used Cars, Trucks

Inflated used-vehicle prices have started to come down at the wholesale level, and that implies consumer demand may also have declined, due to higher interest rates, higher average monthly payments, and economic uncertainty, especially for the most price-sensitive consumers.

“The fundamental reason for softening wholesale values is weak retail demand stemming from consumer caution in an inflationary and uncertain economic environment,” said Tom Kontos, chief economist for ADESA Auctions, in a recent note.

For consumers, retail prices for used vehicles are still high, analysts said. But retail prices should ultimately mirror wholesale prices, as dealers can afford to charge less, for used vehicles that cost them somewhat less.

According to ADESA Auctions data, the average used vehicle sold for $15,254 in October at wholesale, dealer-only auctions, the latest full month available. That was down 6.5% vs. the same month a year ago, and the fifth month in a row the average wholesale price declined vs. the immediately preceding month.

Nevertheless, the average wholesale auction price was still 37% higher in October than October 2019, before the pandemic, ADESA said.

Used-vehicle retail sales are down, partly because new-vehicle sales are down. Fewer new-vehicle sales mean fewer trade-ins.

In a typical business cycle, auto sales go down because demand goes down. In the current cycle, new-vehicle sales have been down because new-vehicle production couldn’t keep up with demand. That was due to a shortage of computer chips and other supply-chain problems, and not because of lack of demand.

Auto industry analysts are watching closely to see whether high prices and high profits can be sustained, if supply improves, and if demand were to fall. That’s a question for both new and used vehicles.

Cox Automotive estimates the average interest rate on a retail, used-vehicle loan will be about 16.3% in December, up from 14.3% in September 2022, or 12.6% in September 2019. At the same time, the average, retail monthly payment would increase to $567 in December, from $551 in September 2022, or an average of $387 in September 2019.

The used-vehicle market still has “plenty of vitality,” said Chris Frey, Cox Automotive senior manager, Economic and Industry Insights, in a presentation on auto results through the third quarter. However, he said, “average interest-rate increases are impacting the market more than previously thought.”