Severe supply constraints and a shift away from public transport during the pandemic resulted in an insane car price bubble that is now about to crash. Car dealers are watching prices drop like a rock in face of rapidly changing market conditions, soaring interest rates, and auto production finally picking up speed. On the other hand, many buyers that purchased their vehicles at inflated prices are now underwater on their loans, which is creating a crisis that is worrying even Elon Musk and other big names in the industry due to its size and scope, with experts warning that financial turmoil is ahead. Vehicle prices, especially of used cars, are about to come crashing down after almost two and a half years of record highs as new supply starts to make its way into the market. From 2020 to 2022, wholesale prices for used cars (adjusted for seasonality, mileage, and age) shot up roughly 88%. Some cars have already dropped in value by as much as 30% since the peak of the bubble. And despite some in-demand vehicles that are still commanding higher than retail prices – industry analysts say the value of secondhand cars is on its way back to pre-pandemic levels.
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Consequently, falling used car prices mean that the vast majority of consumers who took in the past two years are now underwater, so they owe more to the banks on these cars than these cars are actually worth. All of these factors are likely to spark another automobile crisis that will have disastrous consequences. For instance, if today a buyer that is underwater on their loan and purchased their vehicle at the top of the bubble wants to trade it in, dealers would ask them to spend thousands of dollars to cover the difference between the loan and the car value but the consumer doesn’t have that money on hand. “This is the perfect storm: the dealer can’t sell the car, the consumer can’t buy a car and the lender can’t finance a car,” wrote financial analyst Adam Aya. In a new statement, researchers at Moody’s pointed to “Additional downward pressure on used-car prices” coming from “weaker domestic demand” as the combination of rising borrowing costs and elevated inflation “erodes the ability of households and businesses to make big-ticket purchases.”
Meanwhile, JPMorgan says that used car prices are set to fall another 20 to 25% in 2023, and new car prices could drop by 5 to 10% in the coming months. This situation is raising concerns of some big names in the industry in the past few weeks. On Twitter, Elon Musk, Tesla’s CEO, and famous investor Cathie Wood agree that disaster is coming. They are both warning about the ripple effects of this potentially explosive situation.”ARK Invest has been concerned about the impact of declining residual values on the $1+ trillion auto loan market,” Woods commented. “Potentially, the biggest financial crisis ever,” Tesla’s CEO added. Conditions are deteriorating alarmingly fast, so if you have an extra car you don’t particularly need, now is a good time to sell it while prices are high and falling. But if you’re looking to buy a car, you should probably wait a little longer. With used car prices falling around 2% per month, the value of anything you buy right now is going to melt like an ice cube in the sun. And the last thing you want is to be caught up in this colossal mess.
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