Used-car price tumble spells trouble for the U.S. auto market

Keith Naughton

Falling used-car prices last month were a major contributor to subdued inflation for the U.S. economy. Auto analysts warn this could be a lasting trend with major negative implications for new-vehicle demand.

The 1.6% monthly drop in used-car prices last month was the biggest decline in a year, a Labor Department report showed Thursday. The overall core consumer price index increased just 0.1% from the prior month, a smaller gain than expected.

The decline in used-car prices is explained in part by rising returns of vehicles that have reached the end of consumer leases, according to Charlie Chesbrough, Cox Automotive’s senior economist. Analysts have warned for years that a glut of off-lease vehicles was coming and would pose a risk to carmakers by making used autos look like better bargains than new ones.

Andrej Petrovski, of Commerce Township, works with sales consultant Sean Walker at Southfield Chrysler Certified Pre-Owned dealership in Southfield. Auto analysts warn that falling used-car prices could be a lasting trend with major negative implications for new-vehicle demand.

“It’s only going to get more competitive for the new side,” Chesbrough said Thursday during a tour a Michigan auto-auction facility run by Manheim, which Cox owns. “If we continue to see used prices decline, it will provide another value option, another buying option for folks who are in the market.”

Adam Jonas, Morgan Stanley’s auto analyst, wrote in a report last week that his team has “tried to call the top of the used car market (incorrectly) for much of the past five years.”

Still, Jonas cautioned that if the value of consumers’ used cars drop, they may have trouble continuing to secure the financing needed to buy new vehicles in the coming years.

“Continued resiliency in used has been arguably the most important driver of continued affordability,” Jonas wrote in the Oct. 3 report. “Without such an accommodative lending environment we can only speculate what a natural’ level of U.S. auto sales would be today. If we had to guess, we’d say sales would be closer to 14 million than 17 million.”