CarMax’s rising inventory offers hope for used-car buyers

The past year has been a wild ride for the used car market. A shortage of new cars caused by supply chain bottlenecks and insufficient production of automotive chips caused dealers to impose eye-watering price tags on their inventory.

This added to economy-wide labor shortages and rising costs of running a dealership. Prices soared well above inflation for most other consumer goods. And although prices remain well above where they were before these disruptions, there have recently been signs that things could be looking up for consumers in need of a new (used) ride. – at least for those who don’t mind buying online.

Last month, data from our parent company Thinknum Alternative Data showed that online used car prices had took a slight dip. While a 3% month-over-month decline in prices after almost a year of continuous increases is hardly cause for celebration, it does suggest that the price trend may be reversing. A few weeks later, we now see a potential cause.

According to current data from Thinknum, the inventory of the online used car marketplace CarMax has increased by more than 75% since the beginning of the year. The automotive industry traditionally measures inventory in terms of the number of days its current stock can last, given current levels of demand. The company now has enough cars in stock to meet thirty-day demand.

While the champagne and fireworks are still premature, that’s certainly cause for optimism. The inability of automakers to keep up with demand is largely responsible for the current exuberant prices for new and used vehicles. The increase in inventory could indicate that dealers are finding ways around supply issues, which could lead to some relief on the price front.

CarMax and other online auto sellers source their supplies largely from car owners. The bid price is determined by an algorithm and is generally higher than you would expect from a brick and mortar dealership. This makes them more competitive in building inventory, while their rich customer data repositories make them more nimble in meeting consumer demand.

Despite their unique position in the market, rising inventory among online used car sellers could signal a turning point for the automotive industry as a whole. Some car manufacturers have already increase in productionand industry analysts predict that car shortages continue to decrease throughout the year. Additionally, the Federal Reserve’s recent decision to raise interest rates is likely to dampen demand for cars, as the cost of auto financing is expected to rise. Although we are still far from out of the inflationary wood, the data suggests that we are moving slowly.

However, the automotive industry will continue to face its old challenges and will have to adapt to new ones created by global calamities. The war in Ukraine has led to new supply chain disruptions, manufacturing difficultiesand additional inflation driven by rising fuel prices. The recent disturbances in the operations of some Chinese ports and manufacturing facilities due to COVID outbreaks are adding to the delay in recovery. Nevertheless, these factors will hopefully only constitute a temporary brake on the return to equilibrium of the second-hand market.

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