Photo: Carvana
Back in December 2021, analysts projected that the used car price bubble would pop in 2022, or it will fizzle out and deflate. Well, the time has come, at least if we look at what used car retailers are saying these days. Several retail giants in the field have noted a reduced profit when compared to previous expectations, as well as a drop in share value due to lower sales figures.
In the case of Carmax, their quarterly results have shown that earnings fell short of the adjusted expectations from stockbrokers on Wall Street and that sales overall have gone down 28 percent when compared to the same period of last year.
The drop of Carmax's shares led to the Carvana decline and mildly affected automakers such as Ford, General Motors, and Stellantis. The vehicle manufacturing conglomerates had a two-percent drop in share value, and analysts think it was because the sale of used vehicles is on a downward trend.
Focusing on Carmax, according to its filing with the SEC (you can read it below in the press release section), sales reached 298,807 units in the third quarter of 2022, and the result is a 28 percent drop over Q3 2021. According to the company's CEO, the decline was caused by "affordability challenges," as well as "climbing interest rates, low consumer confidence, and widespread inflationary pressures."
In other words, Carmax found that more people considered that they cannot afford a vehicle sold by them, and it was more expensive for potential customers to get a loan. Moreover, people were not sure about what would happen in the future regarding their loans and their monthly installments, so the people who opted against buying a car (from Carmax, at least) were put off because of the reasons above.
It is unclear what happened to all the customers who were looking for a car, but decided against getting one from Carmax. Sadly, we will have to wait to see other statistics regarding used vehicle registration figures in Q3 2022 to know if Americans have decided to stick with the vehicles they already had, or just tried to get a better deal on the open market instead of existing dealer offers.
As usually happens with these situations, the most affected people are those who bought a used vehicle at an elevated price when compared to its market value, and those who lost the most are the people who financed used vehicles.
In the latter case, people had to deal with higher lending costs, so an increased APR, thus bigger monthly payments, as well as a higher price to pay for a used vehicle that will depreciate faster than they can pay for it.
In the worst possible scenario, people have acquired overpriced vehicles, and out of their affordable spectrum, and those vehicles have either broken down or have been repossessed because the owners could not afford to make payments on them.
The problem was at its worst for people with a credit score below 699, who reportedly had a two-digit interest rate that averaged at about 15 percent, while those with under 600 had a 20% interest rate on a loan for a used car, presuming they were eligible for a loan. As a general idea, every time someone checks your credit score, it will drop, so refrain from checking it unless you have to.
It is important to note that Carmax itself bought fewer vehicles because of slowing demand, which meant a 39 percent decrease in purchasing for the giant, which was another cause of the slowing down of the market.
Many of these actions are linked together in the economy, and when an entity that usually acquired over 300,000 vehicles a year decides to get less to safeguard its earnings and reduce its exposure, smaller players get stuck with a larger inventory.
Eventually, the companies caught out with an expensive inventory that cannot be sold at a profit get the biggest hit, and consumers will have to foot the bill in the form of more expensive loans, as well as vehicles that dealers will be reluctant to sell at a discount to prevent losing money on each unit, even though they overpaid for a used vehicle when they acquired it initially and the market was higher.
The drop of Carmax's shares led to the Carvana decline and mildly affected automakers such as Ford, General Motors, and Stellantis. The vehicle manufacturing conglomerates had a two-percent drop in share value, and analysts think it was because the sale of used vehicles is on a downward trend.
Focusing on Carmax, according to its filing with the SEC (you can read it below in the press release section), sales reached 298,807 units in the third quarter of 2022, and the result is a 28 percent drop over Q3 2021. According to the company's CEO, the decline was caused by "affordability challenges," as well as "climbing interest rates, low consumer confidence, and widespread inflationary pressures."
In other words, Carmax found that more people considered that they cannot afford a vehicle sold by them, and it was more expensive for potential customers to get a loan. Moreover, people were not sure about what would happen in the future regarding their loans and their monthly installments, so the people who opted against buying a car (from Carmax, at least) were put off because of the reasons above.
It is unclear what happened to all the customers who were looking for a car, but decided against getting one from Carmax. Sadly, we will have to wait to see other statistics regarding used vehicle registration figures in Q3 2022 to know if Americans have decided to stick with the vehicles they already had, or just tried to get a better deal on the open market instead of existing dealer offers.
As usually happens with these situations, the most affected people are those who bought a used vehicle at an elevated price when compared to its market value, and those who lost the most are the people who financed used vehicles.
In the latter case, people had to deal with higher lending costs, so an increased APR, thus bigger monthly payments, as well as a higher price to pay for a used vehicle that will depreciate faster than they can pay for it.
In the worst possible scenario, people have acquired overpriced vehicles, and out of their affordable spectrum, and those vehicles have either broken down or have been repossessed because the owners could not afford to make payments on them.
The problem was at its worst for people with a credit score below 699, who reportedly had a two-digit interest rate that averaged at about 15 percent, while those with under 600 had a 20% interest rate on a loan for a used car, presuming they were eligible for a loan. As a general idea, every time someone checks your credit score, it will drop, so refrain from checking it unless you have to.
It is important to note that Carmax itself bought fewer vehicles because of slowing demand, which meant a 39 percent decrease in purchasing for the giant, which was another cause of the slowing down of the market.
Many of these actions are linked together in the economy, and when an entity that usually acquired over 300,000 vehicles a year decides to get less to safeguard its earnings and reduce its exposure, smaller players get stuck with a larger inventory.
Eventually, the companies caught out with an expensive inventory that cannot be sold at a profit get the biggest hit, and consumers will have to foot the bill in the form of more expensive loans, as well as vehicles that dealers will be reluctant to sell at a discount to prevent losing money on each unit, even though they overpaid for a used vehicle when they acquired it initially and the market was higher.
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