Lessening demand in a red-hot used car market could result in price drops.
Higher interest rates combined with record-high inflation has made owning a vehicle unaffordable for some. Plus, supply-chain issues as a result of the pandemic meant that fewer new cars were being manufactured. That resulted in greater demand for pre-owned vehicles, driving up prices to astronomical levels—up more than 20% in one year.
Nearly 13% of car buyers have a record-high payment of $1,000 a month or more, reports stock analyst C. Scott Garliss at Stansberry Research.
An increased number of vehicle repossessions show that these payments are clearly not sustainable. Buyers are now defaulting on loans made in 2020 and 2021 when loan forgiveness and pandemic stimulus money were available. Now, as loan payments restart and buyers’ paychecks return to normal, they’re struggling to make car payments, Garliss notes.
Default rates have doubled since 2020. California had a 8.7% default rate, Texas 10%, and Washington, D.C., 23%.
With fewer consumers able to purchase a used vehicle, some major distributors may have to start slashing prices.
Carvana finds itself searching for ways to cut costs. After misjudging the effect higher interest rates and inflation would have on the market, Carvana laid off 12% of its employees, The Wall Street Journal reports.
The online car company has sold fewer cars this year than last year, an indication that the average buyer just can’t afford the prices anymore. During the first quarter this year, Carvana sold 7,800 fewer cars than last year.
With consumer demand dropping, retailers like Carvana may be forced to lower prices as well.