Now is a good time to buy a used car – or soon will be, again. A house, too. Both for the same reason: Rising interest rates are making it more difficult to buy these things. Demand softens, prices lower. Sellers have the choice: Take less or get nothing.
The catch is, you’ve got to be able to afford to buy.
Increasingly, many can’t.
This is why the used car market is collapsing. Or rather, used car prices – and profits – are. Carvana – which was making lots of profit re-selling (re-financing) used cars – is a kind of canary in the coal mine and it just fell off its perch, onto the newspaper below. The value of shares in this once-hot-commodity is down 97 percent – and bankruptcy appears imminent.
“We are lowering our price target from $7 to $30 to reflect a higher likelihood of insolvency by 2024,” said market analyst Colin Sebastian earlier this week. Carvana shares fell to $6.70 on Tuesday – headed toward zero, probably. Chiefly, because Carvana did the opposite of what it’s necessary to do to make rather than lose money.
It bought high – and now must sell low.
Much of Carvana’s inventory of used vehicles was bought up during the time when the supply of new vehicles was low, which drove up demand – artificially – for used vehicles because they were often the only vehicles available. Interest rates on car loans were also low – and this induced a kind of artificial affluence that, for awhile, made it feasible for used car sellers like Carvana to sell used vehicles at new vehicle prices – and for people who really couldn’t afford to pay those prices to finance the purchase.
That’s all unwinding now.
Used car prices are falling – because new cars are generally available, again. Why pay new car prices for a used car? That’s a big problem for those – like Carvana – that banked upon being able to sell used cars for new car prices. It is also a problem for those selling new cars, too – for now a used car is a more affordable alternative to a new car. Assuming you can afford to buy (rather than finance) one.
An interesting storm is brewing.
As interest rates continue to rise, fewer people will be able to finance new cars, irrespective of their availability. This problem will wax as new car inventories stack up and new car prices continue to rise, as they must. This being a function of two facts:
One, the buying power of money is decreasing – which means it requires more to buy the same.
Two, it is not the same. It is more expensive as well as more pricey. The cost of regulatory compliance continues to increase – and those costs can’t just be swallowed. They must be folded into the price of the new car.
On average – just over the course of the past year – new car prices have gone up by $600. It may not seem much in the context of the average price paid for a new car, which is approximately $35,000 as of this year. But when you add increased interest – paid on the increased principle – the cost of the monthly payment inches (and may soon gallop) toward the unaffordable.
That will result in a further weakening sales of new cars, which is already happening, as a recent article in Forbes documents. People are running out of “stimulus” money – and what money they have left has had its buying power diminished by 8-15 percent, depending on whose numbers you use.
This weakening of new car sales will – well, would in ordinary times – result in used car prices going up, as demand for them (as an alternative to a more expensive used car) goes up.
But – aye, here’s where it is going to get interesting – very few people can afford to just buy a used car. Because very few people have the money to buy one. The cash – which is all most private sellers will accept. Used car dealers will, of course, try to finance the buy. But rising interest rates are making such financing – which is always higher to begin with on used cars because their value has already depreciated substantially relative to a new car – harder.
According to NerdWallet, the average cost of money – i.e., of interest – on a used car loan is about 8.33 percent, or almost twice as high as the 4.33 percent interest typically paid in interest on a new car loan.
That was in August, by the way.
Three months down the road and the cost of money for a used car loan approaches 10 percent – for those with high credit. Those with less-than-great credit are looking at paying 11 percent or more for money.
Most haven’t got it to spend.
What will be the result? In all likelihood, a deflationary spiral. The prices of new and used cars will fall – to the level at which people can, once again, afford to buy (and finance). In the meanwhile – before that floor is reached – it will be exactly the right time to buy a used or new car, for those who can still afford to actually buy them.
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