Mar 15, 2023
The U.S. car market is collapsing before our very eyes, and used car prices just faced the biggest month-over-month drop on record as supplies went up while demand vanished. Auto sales are plunging so deep that some famous carmakers are already slashing prices by over $10,000! Meanwhile, lenders are in panic as millions of buyers see themselves underwater on their auto loans. The situation is chaotic and the outlook is alarming.
The average used car price in America currently costs $29,533, down from the record high of $31,095 reached in April 2022, but still 45% higher than the 2019 average. Between 2020 and 2022, used car prices surged by almost 70%, and despite some sharp losses seen since December, there’s more downside ahead.
Just as used car prices have spiked in an unprecedented manner, Americans should get ready for used car prices to drop by 50% to 60% from where they are today. The price crash is going to be significant – and quite painful for some motorists – but still, we may never come back to “normal” levels, experts say.
In a recent analysis, they forecasted that by the end of the car market crash, roughly $1 trillion worth of both new and used cars could be wiped out from the system. Like any financial bubble, what goes up, must come down. The used car price bubble burst means that millions of car owners will owe more than what their car is worth. In other words, all people overpaying for used cars right now may see themselves underwater on their auto loans soon.
The latest reading of the Manheim Used Vehicle Value Index showed that wholesale auto prices dropped a whopping 15% month-over-month, the largest annualized price decline ever in the 26-year history of the index. On the supply side, it could take years for a healthy balance to be achieved again. A recent study conducted by the car insurance comparison site Jerry found that the U.S. auto market won’t recover in the foreseeable future.
In fact, car sales had a terrible start to a year in 2023, going down by 8%, the lowest total since 2011 when the economy was trying to reignite after the Great Recession. Automakers sold 13.9 million cars, trucks, SUVs, and vans, compared to a historic average of 17 million. Analysts are now expecting sales to decline by roughly 1 million in the coming months, and we’re already witnessing the harsh effects plummeting demand can have on the market.
Red flags are emerging everywhere. Amid an ongoing bank collapse, Wells Fargo just reported higher-than-expected losses from auto loans. Meanwhile, Fifth Third Bancorp (FITB) is reducing loan originations, likely seeing the threats on the horizon. No wonder why Elon Musk is saying that this can set off the “biggest financial crisis in history.” The liabilities are far greater than lenders would like to admit. And now that banks started to collapse, we have a ton of system risk stemming from the car price bubble. A 2008-style crash with automaker bankruptcies and widespread bank failures is starting to unfold, and the result will be disastrous.Show less