Higher Interest Rates Make Used Cars Even Less Affordable

By: James Flippin · October 03, 2022 · Reading Time: 3 minutes

Car Prices Drive Higher

Since August 2019, car prices have shifted into another gear and accelerated even higher. Used car prices are up 48% over that three-year span, while new car prices are up 30%.

Thanks to higher prices for things like clothing and groceries amid persistent inflation, consumers have pulled back on their car shopping. For dealers, this weighs on profits.

Take CarMax (KMX) for example, the nation’s largest used car dealership. The company reported that its most recent quarterly earnings plunged 54% year-over-year, as it sold 6.4% fewer cars compared to the same time period last year. The share price of CarMax, Autonation (AN), and Carvana (CVNA) all slipped on the news.

Just More Inflation?

Used car prices have been rising steadily for three years mainly due to issues with the production of new cars. A shortage of key parts and COVID-related supply chain disruptions limited the production of new cars, forcing would-be new car buyers into the used car market.

Both difficulties producing new cars and challenges associated with deliveries made cars harder to come by. Each of these problems combined to force prices up.

What About Drivers?

For consumers, this issue is a double whammy. Both new and used car prices are increasing, which makes it tougher to buy a new ride. At the same time, the Federal Reserve has been enacting rate hikes. This makes it even more expensive for buyers who plan on financing the purchase of a new or used vehicle.

While this isn’t an ideal scenario, consumers have a handful of options while they wait for the car market to cool.

To start, if you don’t commute to work, it may actually be cheaper to use Uber (UBER), Lyft (LYFT), or car-renting marketplaces like Turo to get around in the short term. Remember, owning a car comes with significant variable costs like gas, insurance, maintenance, parking, and potentially a car loan payment. When it all adds up, depending on your own personal situation of course, it might be more affordable to pay for the occasional ride.

There has also been a rise in micro mobility companies like scooter-sharing service Bird (BRDS) for shorter trips. Electric bikes have also become popular, which can be another easy way to get around town.

With car prices on a steady incline, making a short-term lifestyle change could be a better option as opposed to ownership. At least until the red-hot car market cools off.

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