Strong Demand, Interest Rates Causing Jump in Used Car Prices

Compact, midsize sedans driving the shift.

by on Oct.08, 2018

Used vehicle prices are on the rise and that's unlikely to change in the near term, especially for compact and midsize sedans.

Car buyers looking for a deal by getting a used car are going to be sorely disappointed — used vehicle prices are on the rise.

According to the latest data from Manheim, used vehicle values set a new record for the third month in a row, which is unusual. The abnormal summer bounce began in mid-June and drove prices higher for 11 straight weeks.

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That changed some with the arrival of September, which saw several weeks of normalizing depreciation. However, it wasn’t enough to offset the overall jump in prices as 3-year-old vehicles are now worth 4.5% more than they would normally be worth had typical depreciation occurred through July and August, according to Manheim.

On a year-over-year basis, all major vehicle segments saw price gains last month with more affordable vehicles seeing the greatest increases. Compact cars and midsize cars outperformed the overall market, while vans, utility vehicles and pickups underperformed the overall market.

(Fiat Chrysler outsells Ford in September. Click Here for the story.)

“The strong wholesale prices we saw in the fall of 2017 were driven mostly by major hurricane activity, causing significant vehicle loss in Texas and Florida,” said Jonathan Smoke, chief economist for Cox Automotive, parent company of Manheim.

Used car prices are rising, up nearly 4.5% in the last few months.

“This year, the abnormal rise in value seems to be mostly man-made, driven primarily by consumer demand, rising interest rates, and threats of tariffs. Consumers and dealers alike had reason to believe the cost of buying a vehicle would be more expensive later in the year, so there was a strong sense of urgency and ‘buy now’ mentality in both new and used.”

Wholesale used-vehicle values are forecast to remain relatively strong going forward as supply is on the decline and the mix of vehicles at auction shifts. Year-to-date, 51% of auction volume has been sedans, mostly compact and midsize cars, while popular SUVs make up only 31% of the volume.

(Click Here to see more about car buyers and financing.)

However, as new SUVs have outsold new sedans for some time now, used SUV volume is growing, while car volume shrinks. Consumers can still find a good deal, they just need to buck the trend, i.e. buy a sedan rather than an SUV or truck — however, that applies only to new vehicles, according to Manheim.

The supply of sedans in the new-vehicle market is near a six-year low, making them more in demand in the used market. As a result, compact cars and midsize sedans are the best-performing vehicle segments on the Manheim Index in September.

According to Cox Automotive estimates, used-vehicle sales volume in September was down 2% year-over-year. The annualized pace of used-vehicle sales, however, was up almost 1% over last year, led by franchised used-vehicle sales (up 1% in September on an annualized basis) and private-party used-vehicle sales (up 4% in September on an annualized basis). Cox estimates the September used SAAR to be 39.4 million, down from 39.7 million last September.

(To see more about new vehicle sales rising slightly in August, Click Here.)

Cars continue to see sharp declines as sales in September fell 21% compared to last year. The market share for cars came in under 30% for the second straight month, which means that the shortage of sedans in the used car market should continue for some time, inflating prices during that time. In short, the best deal may be a used SUV for a long time.

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