I follow a guy on Twitter who posts a lot of interesting data and insights into the used car market - he just posted that Jan marked the second consecutive month of non-adjusted price decline at Manheim auction. It was minimal, basically a 1% decline but it's the first decline of back-to-back months in quite a while. He believes used cars will get back to a "more normal" depreciation schedule in the next few months. He also referenced a Morgan Stanley report that they expect a 10% pull back in used car pricing in 2022. Tons of people in the replies to his tweet saying they're seeing used car prices drop in their local markets (anywhere from 5-10%).

He has access to all kinds of data that I don't have, and has been in this business 15+ years so I value his expertise on the topic. However, I look at it and see a potentially different view:
Used car prices are up approximately 40% compared to a year ago. Ford and other manufacturers have said they think they will face chip shortages through 2023 on new cars. So new car availability will still be lower than normal for potentially 2 years, driving demand for used cars and keeping the prices high. With everyone over-paying by 30-40% for used cars, any type of correction is going to put them into negative equity (potentially at a very high amount). So people might consider keeping that used car WAY longer than they typically would. So now there could be even LESS used car inventory out there in the future.

So I ask, why would the used car prices come down at all between now and the end of 2023?

Chip shortages are improving. For example in the W223 S Class forums they just reported a slew of options that were restricted because of chip shortages that are now unrestricted. You will also have rising interest rates which will slow demand down for car purchases, new and used somewhat. High inflation will also temper enthusiasm for big purchases like a car.

In my industry (real estate) the market right now is completely bonkers. Worse than last year, but forecasted interest rate changes will take buyers out of the market which will slow demand down some (which is a good thing). It will also make high escalations and overpaying much costlier which will temper that. An example, at a 3% interest rate overpaying by $10,000 only costs a buyer about $30 a month, $100k about $300 a month. If I told you this hell of looking for a house would stop if you paid an extra $100 a month...you would do it.

The same is true with cars, low rates mean a big ADM only increases their payment somewhat, so they eat it. Higher rates increase that impact.

The cost of everything has gone up dramatically which leaves less to spend on a car.

Over the weekend my son asked me if he should replace his '18 Accord as its trade value is quite high. I then checked inventory at the local Honda store. Their pre-pandemic inventory was typically about 200 new cars. At present they have 27 in stock, none of which are CRVs or Odysseys.

It's hard to see prices declining much, if at all, as long as such a situation continues.

I have also noticed though that dealer inventories are improving. I drove by my Mercedes dealer for instance the other day and they had more cars than I have seen on their lot in a long time.

Thats just it though, its not going to continue. You will have a slowdown in demand coupled with an increase in supply, and that will cure this situation quick.

It’s going to be a while before things get back to normal. There are still very long waiting lists for higher demand vehicles. You also have to factor in that what we thought was “normal” in the past was really oversupply and now that manufacturers and dealers have had a taste of how the market responds when supplies are tight you can be sure they want the future to look more like that than the past. Cars sat on the lot costs everyone. ADM won’t last forever, but dealing at or closer to MSRP is going to stick around for a while. And all of that has an impact on the used car market. Get used to deliberately tighter supply, deliberately lower inventory, dealers wanting more cars ordered rather than bought off the lot and a transition to the kind of model other countries have always had where dealers have demo inventory but more cars are ordered to spec. That could never have happened in isolation, no one manufacturer could have done that when others still had cars on the lot, but the pandemic changed everything and gave the industry the opportunity to collectively change the way people buy cars.

The difference here is that dealerships and their employees don't like this. The volume of cars sold is dramatically down on a dealership level despite the profit per car being much higher. So, individual salespeople have a much harder time making ends meet...and them sitting around the dealership all day doesn't make much sense as they may only sell 1 car a week or a couple cars a month. So dealers are cutting hours, etc. Dealerships like having inventory on the lot...and what we have seen in the US at least is what dealerships want, they get.

the housing market is high up, the car prices are up there; I dont know If it just me but groceries and everything that I am buying seems to be up at least 20%. inflation? I dont see used car pricing going down for few months or the reminaing coming year

We have stayed at the same place at the beach for 35 years, their rates for this summer are 35%-50% higher than last summer. Last summer we rented a 3BR condo oceanfront for $630 a night, they want $900 for the same room. Regular hotel room in the hotel last year was $260. This year its $570.

Everything is up, and that will squeeze families and they will reduce the amount they spend somewhere. If they are paying 50% more for their vacation, maybe they don't buy that car this summer...

What goes up must come down.

Car market will go back down for sure just nobody knows when. If you have a car to sell then definitely now is the best time.

Besides the chip shortage there is also a HUGE labor shortage which is also affecting production and overall supply chain especially transport of goods.

might be a skewed perspective basing it on Mercedes.

aside that, lots of macro factors like potential war in Europe, Asia, Fed policy, etc., which could bring MUCH higher inflation than even now. if that happens, prices for EVERYTHING will continue to skyrocket.

Interesting take on the chip situation - Ford just reported earnings last week and clearly set expectations with Wall St. that they anticipate major shortages of chips for the next 18+ months. Ford is actually shutting down production this week at 6 plants due to chip shortages. Maybe MB has a different supplier, or maybe it's a different chip altogether for the S class. But seems a lot of the manufacturers aren't predicting things to improve much in the short/mid-term.

I think there is a difference in the mentality of buying a car vs. buying a house. If people keep cars for 3-5 years on average, they're having to realize that they'll "eat" the negative equity pretty substantially in a very short period of time which is not the typical case of a home buyer (most people buy knowing they will hold for 5+ years, otherwise it tends to make sense considering to rent).

also, volumes of Mercedes sold in the u.s. is minuscule compared to ford, thus need less chips.

None of my local dealerships have improved their inventory. I think we have a long ways to go before any improvements take place.

One thing to consider is how the domestics have behaved in the past during disruptions. With previous hiccups, shortages, wars, world crisis's, and stock markets falling, the Big Three always came back to the same way they always were... overstock cars and high incentives. I know Covid is different than anything we've ever experienced, but I'm confident the Big Three will always want to go back to the same business model they stuck with. In the end, it likely yields them the best sales and profits. When this happens, it has a trickle effect on the other brands, which in turn follow similar patterns. If I were to break down the science further, it is probably because the average car buyer goes for the sale when he/she has a selection of 100 cars to choose from, and can get the exact color and options, at a discount (all "feel good" things). Those temptations trump going to the guy next door who has two cars to choose from, at MSRP. The kid in a candy store mentality takes over. GM and the other two have relied on this type of shopping for decades, especially when products were mediocre.

Makes no sense for them to produce less cars if they don't change their manufacturing lines and their employee agreements. A manufacturer is most profitable when they are at full capacity so they are incentivized to build up to their current capacity. This chip shortage is just the worst possible outcome for those businesses with high fixed assets and fixed expenses (i.e. unionized workers).

Manufacturers are always going to under-predict and over deliver...