ECON 101
A peek under the post-pandemic hood of used car markets By Robert Eyler
R ecent prices are falling, which means those loans have negative equity. As of October 2024, approximately 24.2% of trade-ins reporting on auto loans shows
increased to attract consumers), and used cars have increased in supply. For those who cannot easily afford new vehicles and those who may have purchased a used car that came off lease at a relatively high price, the shift in supply also shifted the value of used vehicles. Then, it
xxxxxxxxxxx for new vehicles were underwater, according to Edmunds. One of the metrics economists look at to track cycles in the macroeconomy is how changes in loan delinquency mean a change in consumer behavior and ultimately push consumers close to financial problems. As consumers re-arrange their budgets and spending, it can change the way employers hire and begin a downturn that means recession. The pandemic changed the auto market in two ways, one leading to prices rising quickly. Supply chain seizures due to COVID-19 and corporate reactions to the potential health risks of workers slowed inventory growth. The ability to work from home shifted migration patterns such that urban-dwelling workers suddenly needed a car or a second car. When demand exceeds supply, it is mainly fueled by an unknown supply of cars coming online. Prices increased quickly. Auto loans are generally at fixed interest rates, but not always. When car markets have rising prices, used-car markets can hold more value. Generally, used auto markets are an asset market that loses value over time, but the lower cost of used cars allows people to choose a lower-cost option for transportation at their leisure. Loan-to-value (LTV) ratios have increased because, as a reaction to re-opening the economy in 2021, leases have come up to their maturity date, and more cars have been produced. Continued economic growth and lower interest rates have attracted buyers to new vehicles (significantly as incentives have
would lead to consumer concern: if the value of my current vehicle is falling, why should I continue to pay more for a losing value asset? The accompanying graphs show the changing car prices from January 2018 to December 2024 and the quarterly delinquencies in auto loans, mortgage and credit card markets. The reader will notice that the delinquency rates for credit card markets are generally larger than for auto loans. Further, the price dynamics with new and used cars should be noted. The change from 215 to 182 as an index is a 15.3% slide in 32 months. This has generated risk exposure in the used- car loan market. We must watch these markets closely, especially if labor markets do not remain warm regarding continued job growth and parallel income growth after inflation. If interest rates do not fall quickly or perhaps see longer-term rates rise, interest rates on used cars (which tend to be higher and more stable at a higher level than new car rates) may not fall soon. We will watch how all these factors play together to either support a reduction in loan pressures or create more pressure on financial markets. g
Dr. Robert Eyler is professor of economics at Sonoma State University and president of Economic Forensics and Analytics in Sonoma County.
44 NorthBaybiz
April 2025
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