Used car prices are finally cooling off, but it still won't be easy to buy one

car dealer — The old-fashioned way to buy a car.
REUTERS/Carlos Barria

Used vehicle prices went up just 0.2% last month after three months of record increases.
The price is still up more than 40% over last year, US government data show.
Actual relief may be a long way off due to supply challenges in the new car market.
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The used vehicle market is finally showing signs of leveling off after three consecutive months of record price increases, data from the US government's latest monthly inflation report show.

The average price for used cars and trucks ticked up just 0.2% in July, barely moving after June's 10.5% spike was responsible for a third of the overall rise in inflation.

But even though the picture didn't get worse for car shoppers, it didn't get any better either - and it might not improve for a while yet.

Depending on who you ask, average used vehicle prices are still up nearly 42% over last year (according to the Feds), or 23.6% (according to the Manheim Index), which means that used Ford Escape SUV that might have gone for $17,000 will run now you between $21,000 and $25,000.

That leaves a lot of room before prices return to familiar territory, and there are a few reasons that could take some time.

For starters, one reason prices have softened is that fewer people bought used cars last month than normally do. Cox Automotive estimates sales were down about 15% in July from the same month last year.

In other words, it's likely there was less competition between customers to drive prices up. When shoppers do return to dealers' lots at normal levels, it's not entirely clear where the inventory will come from since there's no such thing as a used-car factory.

Normal used retail supply is typically around 44 days worth of inventory, meaning that dealers have enough cars in stock to sell for a month and a half. July ended with 39 days' supply.

The problems in the new vehicle market continue to cause ripple effects, most notably from the lack of semiconductor chips needed to make modern cars go.

"This 'two steps forward, one step back' path toward increased semiconductor availability and light vehicle production is likely to limit the pace at which used vehicle prices decline," JPMorgan autos analyst Ryan Brinkman wrote in a research note.

New vehicles meanwhile continued their price increases with another 1.7% bump last month for a year-over-year increase of 6.4%, according to the inflation report. Since all used vehicles begin their lives as new vehicles, those higher new prices are likely to get baked into their eventual cost.

Another (related) reason for the constrained supply is that rental companies like Avis and Hertz are hanging onto cars longer instead of selling them into the used market.

A decade ago, 30,000 miles on a rental car was considered high. Last year, the mileage averaged around 50,000. Last month, that number hit 88,000, according to Manheim. Plus, those units sold for 6% more this year than last year.

"Even in six months, you're still going to be facing some type of slightly appreciated prices, just because there's so much demand that's going unfulfilled right now," Ivan Drury, senior manager of insights at Edmunds, said,

New-car prices will have to come down before any real improvement will arrive in the used market, he said. Until then, buyers shouldn't hold their breath.

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