Image source: WBUR
With higher prices and rising interest rates amid inflation, shoppers find it hard to dream of big purchases.
Houses, cars, and even gadgets have become unaffordable luxuries for most people.
Used cars are also plagued by inflation for car buyers.
CarMax, the largest used car dealership in the United States, saw its sales drop sharply.
On Thursday, the company said its profits fell 54% as the number of cars sold in the quarter fell 6.4% from 2021.
CarMax attributes the decline to “vehicle affordability challenges” resulting from inflationary pressures, rising interest rates, and low consumer confidence.
Although higher prices boosted the company’s overall sales, the results lagged analysts polled via Refinitiv.
The figures alarmed investors.
Shares across the industry
On Thursday, shares of CarMax (KMX) plunged more than 24%.
They weren’t the only ones, as the shares of other auto dealers all fell.
Shares of competitor Carvana (CVNA) fell 23%, while AutoNation (AN), the country’s largest new car dealer, fell 10%.
Meanwhile, other automakers such as General Motors (GM), Ford (F) and Tesla (TSLA) also had lower stakes.
Car prices have risen steadily over the past two years.
The shortage of parts, especially computer chips, has limited supply due to increased consumer demand.
Rising prices have played a major role in general inflationary pressures, as roughly 40% of US households buy a car every year.
In recent months, the Federal Reserve has aggressively raised interest rates (at a historic pace) to keep prices in check.
The central bank has also tried to reduce consumer demand and slow the economy.
Used car prices today
According to the Consumer Price Index, a key measure of inflation, used car prices have fallen 2% from their all-time high in January last month.
However, the numbers are still 48% higher than in August 2019.
Meanwhile, new car prices hit a record high in August this year, rising 30% over the past three years.
According to CarMax, the average car price for the three months to August was $28,657, up 9.6% year-over-year.
However, it was also down 1% sequentially.
However, CarMax executives said it’s not just the cost of buying and financing a car that’s been dragging down sales.
General pressure on household balance sheets due to general inflation has also been a problem.
William Nash, the CEO of CarMax, was addressing investors when he pointed out that the prices were higher than before.
“Consumer confidence, certainly during the quarter, [reached] all-time low as far as recent history, I mean even lower than the height of the pandemic,” he said.
“So I think consumers are prioritizing their spending a little differently.”
Due to the increase in reserves to cover any credit losses in the financial sector, CarMax’s results also suffered.
The company more than doubled the $35.5 million it had in reserve a year ago, reaching $75.5 million at the end of the final quarter.