Rising prices put used cars out of reach for US buyers

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High prices and rising interest rates are putting used cars out of reach for a growing number of car buyers.

That’s bad news for CarMax, the country’s biggest used car dealer. CarMax said on Thursday its profits were down 54% as the number of cars sold in the quarter dropped 6.4% compared to a year ago.

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The company blamed “vehicle affordability challenges stemming from widespread inflationary pressures, as well as rising interest rates and low consumer confidence.”

While the higher prices boosted the company’s overall revenue, the results were well below the forecasts of analysts surveyed by Refinitiv. This set off alarm bells for investors.

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CarMax shares are down more than 24% on Thursday, and shares of other auto retailers have also been hammered. Shares in used car rival Carvana are down about 23% and AutoNation, the country’s biggest new car dealership, is down 10%. Shares of many automakers, including General Motor, Ford, Stellantis and Tesla, also tumbled.

Car prices have been rising steadily for the past two years as a shortage of parts, particularly computer chips, has limited supply in the face of strong consumer demand. These higher prices have been a major factor in overall inflationary pressures, as around 40% of American households buy a car each year.

The effort to contain prices has prompted the Federal Reserve to raise interest rates at a historic pace in recent months as the central bank tries to ease consumer demand and slow the economy.

Used car prices — while down 2% in August from their record high in January — are still 48% higher than in August 2019, according to the Consumer Price Index, a key measure of inflation. New car prices hit a record high in August, up 30% over the past three years.

CarMax reported an average price per sales vehicle of $28,657 for the three months ending in August, up 9.6% from a year ago but down 1% from the previous quarter.

But it’s not just the cost of buying and financing a car that has hurt sales, according to CarMax executives. General pressures on household budgets from higher prices have generally become an issue.

“Groups are higher than ever,” CarMax CEO William Nash said on a call with investors. “Consumer confidence, certainly during the quarter, was the lowest in recent history, I mean even lower than the height of the pandemic. So I think consumers are prioritizing their spending a little differently.”

The company’s results were also hurt by the increase in reserves to cover possible loan losses in its finance arm. CarMax more than doubled the $35.5 million it had in reserve a year ago to $75.5 million at the end of the most recent quarter.

Source: CNN Brasil

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