Monday, February 16, 2009

Another bounce: used car prices

I'm encroaching on Mark Perry's territory here (a great economist who teaches at the University of Michigan in Flint), and I'll admit to a bias to searching for evidence of an economic bounce whereever I can find it. Still, given the pervasive bearish mood, the more examples I find, the more likely it is that the consensus view on the economy is incorrect. This chart comes from data compiled by Manheim Consulting. "The Index is based on all completed sales transactions at Manheim’s U.S. auctions (A useable sample size of over five million transactions annually)." Here's their explanation for the January '09 bounce:

January’s improvement in wholesale pricing reflected dealer attitudes that were boosted by better-than-expected used vehicle operations. The continuing falloff in new vehicle sales activity also pushed trade-in volumes down much further than the demand for used vehicles and, thus, increased the need for auction purchases.

In other words, we have a market that is the process of self-correcting. Reduced demand for new cars has reduced the supply of used cars on the market, and falling prices for used cars have awakened demand for those same cars. We see the same thing happening in real estate markets across the country: lower home prices have stimulated the demand for homes, resulting in significant increases in home sales activity in recent months. Yesterday Mark posted a good series of charts to illustrate that.

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