The Federal Reserve's continued interest rate hikes haven't hit the job market, which is in short supply, but it has hit the booming second-hand car market hard. An industry statistical indicator shows that since the bankruptcy of Lehman Brothers triggered the financial crisis for more than ten years, the wholesale price of used cars in the United States has never plummeted year-on-year like last month.
American auto auction giant Manheim recently announced that the second-hand car value index, which reflects the wholesale price of second-hand cars, fell to 200 in October, a year-on-year decrease of 10.6% from a year ago, the largest drop since December 2008, and the fifth since Manheim kept records large year-on-year decline.
The index tracks the auction car prices paid by auto dealers. The index has fallen for eight of the nine months through October, including five straight.
Interest rates on U.S. auto loans have reached record highs, driven by the Federal Reserve's interest rate hikes.
Last week, data from Edmunds, a US auto sales and information service website, showed that the average annual interest rate on new car loans in October was 6.3%, the highest since April 2019. Jessica Caldwell, executive director of Edmunds at the time, commented:
"New vehicle inventories may finally be improving, but the auto industry has a long road to recovery as rising interest rates create a major barrier to entry for car buyers."
"Many consumers who are hesitant to enter the market because of high prices and limited choices may continue to do so because of high interest rates."
Commentators believe that since the Federal Reserve has not yet planned to stop, borrowing costs will continue to rise, and the price of used cars may cool down even more. And, the plunge in wholesale used-car prices could signal when the Fed will start to slow down its pace of rate hikes.
Used car prices, once seen as a barometer of worsening inflation, are slowing and have in fact fallen for a year, Bloomberg's multimedia strategist Vincent Cignarella commented. The closely watched gauge is likely to continue to decline as supply chain shortages ease, helping the Fed keep headline inflation in check. The development could also bolster the view that the Fed will scale back rate hikes, boosting stocks.
Of course, everything has two sides. The bad news is that if falling used car prices crush the retail car market, there will be a lot of new car loan borrowers. Consumers with subprime mortgages and high subprime credit scores are already feeling the pain, according to financial blog site Mish Talk.
There is also a view that with the rising loan default rate and the start of the layoff cycle, a wave of car recycling caused by the inability to continue repaying loans has been set off. And, with big banks holding large amounts of consumer debt, the used-car bubble could spread to structured products in financial markets.
After announcing last Friday that revenue and profit in the third quarter were worse than expected due to a sharp drop in demand for used cars, the stock price of the used car retail platform Carvana (CVNA) fell sharply for the second consecutive day. On Monday, it closed down another 15.6%, and the stock price fell to the lowest point in more than five years since it went public.
Carvana’s stock price has fallen by about 49% in two trading days, and its market value has shrunk from $26 billion before the announcement of the third quarterly report to about $13 billion. As of Monday's close, the stock price has fallen 98% from the intraday record high of $376.83 set on August 10 last year.
At the end of last month, Wall Street learned that AutoNation, the largest car retailer in the United States, warned that as the price of used cars fell from the peak, the profit margin of used car sales would decline next year. Research firm Cox Automotive predicted earlier last month that wholesale used car prices could drop 14% by the end of the year.
