Used cars have become unaffordable

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New York
CNN Business

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 nation’s largest used car dealership. CarMax reported Thursday that its profits fell 54% as the number of cars sold in the quarter fell 6.4% from a year ago.

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

Although higher prices boosted the company’s overall revenue, the results came in well below analysts’ forecasts polled by Refinitiv. This set off alarm bells for investors. CarMax

(KMX)
shares plunged more than 24% on Thursday, and shares of other auto retailers were also hammered. Shares of used car competitor Carvana

(CVNA)
fell about 23% and AutoNation

(A)
, the nation’s largest new car dealership, fell 10%. Stocks of many automakers, including General Motor

(GM)
s, Ford

(F)
Stellantis and Tesla

(TSLA)
were also lower.

Car prices have risen steadily over 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 since about 40% of US households buy a car each year.

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

Used car prices – although down 2% in August from the record high set in January – are still up 48% from 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 selling price per vehicle of $28,657 in the three months ending August, up 9.6% from a year earlier but down 1% from the previous quarter .

But it’s not just the cost of buying and financing a car that has held back sales, CarMax executives say. Overall pressures on household budgets from higher prices across the board have become a problem.

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

The company’s results were also hit due to increased reserves to cover potential loan losses in its finance arm. CarMax more than doubled the $35.5 million it held in reserve a year ago to reach $75.5 million at the end of the last quarter.

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