Demand destruction is when prices get so high that consumers are hit with an affordability crisis. That is precisely what is happening with the used car market.
New earnings data from CarMax, the nation’s largest retailer of used cars, showed the number of used vehicles sold for the quarter ending Feb. 28 declined 6.5% while prices were at record highs. Average car prices rose 40% during the quarter, or $8,300, compared with a year ago.
A substantial increase in used car prices over the last year and the recent surge in interest rates could be the catalyst for what has recently sparked demand destruction as buyers go on strike, thus cooling red-hot prices.
“From an affordability standpoint, you’ve got interest rates going up, inflation, you’ve got the Ukraine-Russia war. There just a lot weighing on the consumer right now.
For “the lower credit spectrum customer, certainly, we feel affordability has maybe often priced them out of the market,” Bill Nash, Carmax’s CEO, told investors on a conference call.
Last week, the Manheim Used Vehicle Value Index, a wholesale tracker of used car prices, dropped 3.8% in March from February, the largest monthly decline since April 2020 (only Feb 2007 and two prints in the fall of 2008 were worse before that).