While various media reports that soaring prices in the housing sector have recently led to a slowdown in sales, analysts have now turned their attention to the used car market. One of the standout features of the post-pandemic paradigm, a combination of factors — including stimulus checks and supply chain disruptions — has driven consumers to used-vehicle dealerships. However, the changing tides present significant ambiguities about what lies ahead.
On the one hand, the main factors that have recently weighed on residential property prices, namely rising interest rates and the burnout of potential buyers, could also hamper the meteoric rise of the car market. second hand. With the Federal Reserve committed to fighting inflation, borrowing costs will naturally rise, resulting in deflated demand. Moreover, the implosion of previous pandemic winners like carvana (NYSE:CVNA) seems to support this bearish outlook.
On the other hand, personal vehicles are an essential cog in the American economy. According to the World Economic Forum, which cited data from Statista, 76% of US commuters “use their own car to get between home and work, making it by far the most popular mode of transportation.”
In other words, while not everyone needs or wants to buy a home, having access to your own set of wheels is essential. That’s especially true in states like California, where public transportation networks aren’t as robust as in east coast metropolitan areas.
This dynamic sets the stage for differing opinions on the outlook for the used car market. Here are some key points for investors to consider.
The used car market bubble could burst
One of the most worrying signs for the used car market is the increase in foreclosures. That’s according to Lisa Beilfuss Popeo, Senior Writer for Barrons. In an interview with CBS NewsPopeo reported that not only have subprime repossessions increased 11% since 2020, but defaults leading to vehicle foreclosures among prime borrowers have doubled from 2% to 4% in the past two years.
The implication is that if people can’t keep their vehicles, massive consumer acquisitions in real estate present a major red flag. Such an unwinding of leverage could have serious economic consequences, which is understandably deflationary for the used car market.
As if that weren’t enough to worry about, accounting firm KPMG noted in a recent research paper that historically, “used car demand would normalize and the relationship to new car prices would be restored. This would imply a fall in used car prices to around 30% below their current level. »
Finally, there is some evidence that the supply chain disruptions that previously plagued the auto market, creating the inventory imbalance between new and used cars, are slowly but surely normalizing. If so, it could mean a slowdown in the used car market as the options available to consumers at new car dealerships increase.
Why high prices may be here to stay
Although higher interest rates and the prospect of an increased supply of new cars pose significant challenges on paper for the used car market, not everyone agrees with the narrative of the bursting of the bubble. Admittedly, prices could dip slightly, but they could remain high.
According to information from Leasly, the addressable market for car dealerships has not diminished. In many cases, demand has increased, perhaps translating into higher prices. On this point, the the wall street journal vehicles reported on US streets recently reached an average age of 12.2 years.
Translation? The decision to buy a car can be driven by mechanical realities, as opposed to consumers making calculated moves based on their local analytics.
Additionally, Russia’s invasion of Ukraine presents substantial headwinds specifically for the automotive market. According to New York Times, “Semiconductor makers are warily watching global supplies of neon, xenon and palladium, needed to manufacture their products.” Both Russia and Ukraine play a major role in some or all of the aforementioned products, which then impact semiconductors that are integral to new vehicles.
As a result, the normalization of the supply chain may not unfold as some bulls anticipate, which means that demand could still be uncomfortably strong in the used car market.
Watch the return to the office
Although the abrupt shift to telecommuting platforms has presented an unexpected benefit for millions of white-collar workers, this corporate olive branch may not last. Interestingly, another article from the New York Times pointed out that “the share of people aged 20-29 who want to work remotely full-time is only 24%, while it is 41% among workers aged 50-64”.
In addition, interns representing the next generation of workers are missing out on important development opportunities. It is likely that many companies are realizing that raising an entire generation of remote workers is unsustainable, primarily due to liability issues. In 2019, the American Management Association reported that employees were losing more than two hours a day at work, resulting in billions of dollars in lost productivity.
Given such waste with supervision, its absence could logically lead to greater loss of productivity. As a result, back-to-office mandates could increase, which could mean greater demand for personal transportation.
As of the date of publication, Josh Enomoto had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.