This would normally have triggered a buyers’ strike, but the inflationary mentality has changed.

By Wolf Richter for WOLF STREET.

Why are people – dealers and consumers – still paying these sky-high prices for used vehicles? For most people, replacing a vehicle can be delayed unless some major calamity befalls the vehicle. This was shockingly proven during the financial crisis, when consumers went on strike by buyers and sales of new and used vehicles slumped and remained weak for a long time. So why is demand now resisting these insane price spikes? Because the whole inflationary mentality has changed.

My gut tells me that these crazy price spikes can’t last long, and some of it will eventually relax, and therefore, they sort of fit the Fed’s definition of ‘temporary’, but they won’t return. not where they were. Part of these price increases will become the permanent basis for future price increases.

Prices for used vehicles sold at auctions in the United States in May were up 4.6% from April, 26% year-to-date and 45% from April 2019, according to the used vehicle value index released today by Manheim, the largest auto auction operator in the United States and a unit of Cox Automotive. Retail prices are about six weeks behind wholesale prices:

Merchants who go to auctions to buy inventory to sell on their lots pay these prices. They bid against each other to get some of that inventory – confident that they can pass those higher prices along with the big profits on to consumers.

These dealerships now also bid against the car rental companies which are normally the largest sellers at those auctions, but now running out of vehicles in their rental fleets amid an explosion in demand for domestic travel, and now they have become auction buyers.

Used vehicle fleets normally buy over 2 million new vehicles per year and circulate them through their fleets and later dispose of them by auctioning them off, on their own retail lots, or direct to de large used vehicle dealers. But that whole flow was cut short last year when travel – and demand for rental vehicles – collapsed. Rental companies have “collapsed” by reducing their orders for new vehicles and by selling part of their fleets at auction.

Now they’re running out of vehicles, just as the semiconductor shortage has hit automakers who can no longer build enough vehicles. So, automakers are prioritizing high-profit, decorated trucks and SUVs that will be retailed by dealerships, where everyone is making a lot of money. And car rental companies have complained – like Avis in its 10-Q filing with the SEC – of struggling to get their orders filled.

Pickup trucks continue to be the hottest WTF price spikes, with prices up 70% from May 2020. The man low on the totem pole was compact cars despised, and even they have seen a rise prices of 39.7% year on year. . In terms of a “base effect” for year-over-year comparisons: it is minimal because the May 2020 auction prices were already on an upward trajectory, after rebounding from the April low, and were just a bit below May 2019.

A buyers’ strike of the kind that occurred during the financial crisis would normally solve the problem quickly: as buyers revolt against these price increases, demand would collapse and supply could catch up, stocks would build up, dealers would reduce their bids. purchases, and prices would fall until demand reappeared.

But this buyers’ strike has not yet started. Instead, the whole inflationary mindset has changed, with consumers scrambling to be able to afford these insane prices, and resellers confident that consumers will continue to pay them.

Total used vehicle sales – retail and wholesale – continued in May at the same pace as in April, and increased 3% from May of last year, at a seasonally adjusted annual rate of 41, 0 million vehicles, according to Cox Automotive estimates.

Retail sales of used vehicles alone also equaled in April at a seasonally adjusted annual rate of 22.4 million vehicles, up from 21.1 million in May of last year.

The offer remains tight for this rate of sales. The used-vehicle retail inventory at the end of May had fallen to 38 days, according to Manheim, while 44 days would be normal; and the wholesale supply at the end of May had fallen to 19 days, while 23 days is normal.

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