Used Car Prices Are Starting to Drop From All-Time Highs. Is the Worst Behind Us?

Used car demand is starting to ease amid record-high prices.

Wholesale used vehicle prices declined 1% in April from March, indicating that car prices may be starting to drop. Used car prices hit an all-time high of $28,205 in December 2021, 42% higher than December 2019, right before the pandemic.

Cox Automotive released its April Manheim Used Vehicle Value Index. The index declined to 221.2, which was up 14% from a year ago. The index has now dropped for three consecutive months, falling from a January peak of 236.3. While prices are still at a historical high, experts believe car prices will return to fairly normal patterns.

Used car sales slow in April

Historically, car sales spike in April as people receive their tax refunds. This year, however, retail sales declined by 13% in April from March and is down 21% from last year. Used car inventory has also increased.

Used car day's supply, which measures how many days of supply dealers have, ended at 46 days. This is nearly 30% higher than the previous year, which was at 35 days. The drop in sales and increase of inventory suggests that demand is starting to ease up.

Car companies battling semiconductor shortage

Supply constraints and pent-up demand are expected to keep car prices high for at least the rest of the year. Car prices skyrocketed during the pandemic due to a combination of supply chain issues, high demand, and a worldwide shortage of semiconductor chips. New vehicles require about 40% more microchips than cars made before the pandemic.

There are only a few microchip manufacturers worldwide, and even with all of them operating at full capacity, experts predict the microchip shortage will continue to last until 2023. This is due to the backlog of consumer demand, low inventory, and low factory output.

The increase in used car prices has had an outsized impact on inflation, leading to a 40-year high. According to data from the U.S. Bureau of Labor Statistics, used car prices' contribution to inflation is more than 1%. For the past 20 years, the number averaged 0%. While the prices for both new and used cars seem to have cooled down, prices are expected to remain elevated for new cars. Consumers should prepare their personal finances accordingly.