Used car market falls back to Earth

About a year ago, the used-car business was a rollicking party. The coronavirus pandemic and a global semiconductor shortage forced automakers to stop or slow production of new cars and trucks, pushing consumers to used-car lots. Prices for preowned vehicles surged.

Now, the used-car business is suffering a brutal hangover. Americans, especially people on tight budgets, are buying fewer cars as interest rates rise and fears of a recession grow. And improved auto production has eased the shortage of new vehicles.

As a result, sales and prices of used cars are falling and the auto dealers that specialize in them are hurting.

“After a huge run up in 2021, last year was a reality check,” Chris Frey, senior manager of economic and industry insights at Cox Automotive, a market research firm. “The used market now faces a challenging year as demand weakens.”

According to Cox, used-car values fell 14 percent in 2022 and are expected to fall more than 4 percent this year. That shift means many dealers may have no choice but to sell some vehicles for less than they paid.

The industry’s difficulties have been exemplified by Carvana, which sells cars online and became famous for building “vending machine” towers where cars can be picked up. It recently reported a quarterly loss of more than $500 million and has laid off 4,000 employees.

In the last 12 months, Carvana piled up debt. Its stock price has fallen by more than 95 percent in the last 12 months, and three states temporarily suspended its operating license after consumer complaints.

“We think there’s a decent chance the company will end up having to file for bankruptcy protection,” said Seth Basham, an Wedbush analyst. “They have too much debt for the level of sales and profitability and can’t support that debt load, and likely will need to restructure.”

In a statement to the New York Times, Carvana said it was confident it had “sufficient” funds to turn its business around, noting the company had $2 billion in cash and an additional $2 billion in “other liquidity resources” at the end of the third quarter.

It has also hired the investment bank Moelis & Co. and is working to reduce its inventory of vehicles and cut the cost of reconditioning them.

“Millions of satisfied customers have responded positively to Carvana’s e-commerce model for buying and selling cars,” the company said. “Although the current environment and market has drawn attention to the near term, we continued to gain market share in the third quarter of 2022, and we remain focused on our plan to drive to profitability.”

CarMax, another usedcar giant, is also hurting, although it is on much steadier ground. In the three months that ended in November, its vehicle sales fell 21 percent to 180,000, and net income tumbled 86 percent, to $37.6 million.

CarMax is trying to avoid deep price cuts to ensure it makes money on each sale, said the company’s chief executive, Bill Nash, even if that means the company’s overall sales are falling. “We’re trying to strike a nice balance between making sure our cars are priced right but also trying to maintain our margins,” he added.

CarMax is being more cautious about acquiring cars and trucks until prices stop declining, Nash said. In its most recent quarter, the company bought 238,000 cars from individuals and dealers, about 40 percent fewer than in the same period in the previous year.

The buying and selling of used cars is an enormous business. Cox Automotive expects about 36 million used vehicles will be sold in the United States this year. Fewer than half as many new cars and trucks are expected to be sold in 2023.

Many consumers turn to slightly used cars to avoid paying the full price of a new vehicle. For consumers with lower incomes or weak credit ratings, older cars with a lot of miles on the odometer are often the only option.

The Federal Reserve’s campaign to raise interest rates to fight inflation has made it harder and more expensive to buy cars. In December, the average interest rate on used car loans was 12.37 percent, up from less than 10 percent a year before, according to Cox Automotive.

CarMax is still attracting shoppers to its website, Nash said, but many now end their search when they realize how much they are likely to pay per month. “People click and see their payment and that’s where they balk,” he said.

The used-car business is made up of thousands of small outlets, many of them family businesses. CarMax is the largest player in the market but only accounts for a sliver of total sales.

CarMax has produced steady profits for more than a decade. It currently has about 240 locations and last year sold more than about 900,000 cars to consumers.

CarMax is well positioned despite the difficult conditions it faces, Basham said: “I think they’re going to emerge from this downturn as one of the best-positioned companies to take additional market share.”

But for Carvana, the logistics of delivering cars and processing all the paperwork has proved challenging . So many consumers complained about long delays getting titles to cars they bought from the company and other issues that North Carolina temporarily suspended Carvana’s business license in 2021. Michigan and Illinois took similar steps in 2022.

Carvana’s financial difficulties were compounded last May when it bought an auto auction company with the help of $3.75 billion in new bonds just as interest rates were starting to rise. Carvana’s debt payments have soared, and investors are worried about the company’s prospects. On Jan. 25, the stock closed at $6.50.

“They closed this acquisition at the worst time,” Basham said. “They added so much debt, it created an albatross around their neck.”