Though the Federal Reserve announced another interest rate hike Wednesday, Cox Automotive Chief Economist Jonathan Smoke believes the worst of the affordability issues for the used car market are in the rearview mirror.
In his “Smoke on Cars” report, Smoke said, “This spring likely represented the bottom for the weak used-vehicle sales trends, as affordability should improve from here, enabling incremental demand to grow.”
Prices have been trending down. In the most recent Manheim Used Vehicle Index there was a sharp decrease in wholesale prices. They are down 11.1 percent from July 2022 and 1 percent from June.
Used retail prices remain steady, according to Manheim’s numbers. The average price has hovered around $27,000 since the start of May. It’s down 3 percent from last year.
“Retail used prices have declined about 3 percent from their peak in April. Used-vehicle prices should see even greater declines over the next three months following large wholesale declines in May, June, and July,” Smoke said in his report.
He also pointed out while the Federal Reserve hike its target rate to 5.25 to 5.5 percent, used auto rates have been retreating.
“Affordability has already been improving in recent weeks as used-vehicle loan rates have drifted lower and used retail prices have also declined,” Smoke said. “The rates consumers pay on auto loans are more closely tied to bond yields and yield spreads than the Fed Funds Rate. Back in March, during the worst of the banking crisis, average used auto loan rates went above 14 percent. Since then, used rates have trended lower and, so far in July, are under 13.6 percent, about a half point below their peak. Today’s policy rate increase may not ripple through the rates consumers see.”
Smoke said the signs of a balancing market are welcomed after the past year.
“The dramatic increase in rates over the last 16 months, along with vehicle price inflation, has effectively priced out 5 to 10 percent of consumers. We have seen the most impact on the used auto, where sales have declined for more than a year,” Smoke said.
