Used car prices will remain high until automakers resolve production issues

If you wait for used car prices to drop and read recent indications as a sign that the price drop has already started, one of the biggest used car dealers in the United States says you shouldn’t be too excited.

The rise in used car prices is unlikely to slow until manufacturers can start producing cars at pre-pandemic rates, according to the CEO of Carvana.

“[Used car sales] the volume is pretty consistent with 2019, it hasn’t changed much – which is materially different, it’s just that there are so much less new cars being made and that drives up the prices. “Ernie Garcia, CEO of Carvana told CNBC’s “Squawk Box” Friday. “I think until the supply chains at [original equipment manufacturers] understand that there will likely be a lasting impact. “

Automakers have struggled to keep production going with the shortage of semiconductor chips.

Ford, which had to cut production of vehicles in North America in July and August due to shortages, said its second quarter results reported that supply was improving but that it had lost about 700,000 vehicles in the during the quarter.

General Motors has said the chip shortage will cut revenue by $ 1.5 billion to $ 2 billion and has slowed down some of its North American assembly plants due to the shortage.

Nissan said in May that it plans to make half a million fewer vehicles this year, while BMW recently warned that it expects shortages to creep in in 2021.

In total, the chip shortage is expected to cost automakers $ 110 billion in lost revenue this year, according to a May report from consulting firm AlixPartners.

The drop in production has been a boon for used car retailers like Carvana. The company announced its profitable first quarter on Friday, generating net income of $ 45 million in the second quarter of 2021. Carvana’s total revenue also increased 198% year-on-year to $ 3.3 billion. dollars, with the delivery of more than 107,000 cars, an increase of 96% from a year ago and the first time in eight years that it has sold more than 100,000 cars in a quarter . Carvana shares are up 44% this year through Friday.

These gains have been accompanied by a sharp increase in used car prices. The average transaction price for a used car was $ 25,410 in the second quarter of 2021, up from $ 22,977 in the first quarter and 21% year-on-year, according to data from online automotive resource Edmunds. That figure marks the highest average price over a quarter for a used car Edmunds has ever followed.

These high prices have helped fuel the used car industry.

EchoPark Automotive, a division of Sonic Automotive that sells used vehicles, also set a record quarterly profit with revenue of $ 595.6 million, up 88.9% year-on-year. the other. Retail sales volume increased 68.9% year-on-year.

CarMax, the largest used car dealership in the United States, reported a 138.4% year-over-year increase in revenue in its fiscal 2022 first quarter ending May 31, to reach 7.7 billions of dollars. The company said it sold 452,188 units through its retail and wholesale channels in the quarter, up 128% from the previous year.

As to when prices might stabilize, Garcia said “in the next six months or even the next 12 months, I think that’s hard to say.”

“What we’re finding is that OEMs have supply chains that are maybe a little more fragile than we all would like and they manufacture thousands of parts around the world and there are waves of Covid appearing in different parts of the world, so I think it’s very difficult to predict when that will normalize again, “he said.

By comparison, Sonic Automotive president Jeff Dyke recently told CNBC’s “Worldwide Exchange” that he expects the chip shortage to ease in the coming months, which would start to push down. the price of used cars.

“New car inventories are going to improve gradually over the next few months as we approach the end of the year,” Dyke said. “As that happens, it will reduce the number of inventory issues occurring on the used vehicle side. “