Over 90% of American households own a car, according to Dr. Jean-Paul Rodrigue in a Hofstra University study. Smart Americans know that buying a pre-owned vehicle is a much better deal. The largest used-car dealer is CarMax ($NYSE:KMX), which, in the fiscal year ending in February 2018, sold over 700,000 vehicles in 188 locations.
As winter thaws and people get their tax returns, late winter and early spring tend to be prime car-shopping season. But shopping for a used car this time of year isn't so smart. Here's why.
Six months ago, we showed how data trends indicate that used car prices rise in March, and predicted that they will do so again this year. That's because for the past three years, there was an increase in average prices in March.
And, sure enough, as of this week, the average price of a used car is up.
While that average is only up $213 from the beginning of the year (from $21,149.92 to $21,362.92), previous trends indicate that further price increases are on the way. In 2018 and in 2017, average CarMax prices peaked in mid-March.
The law of supply and demand
A cyclical price increase means that there is either a seasonal demand spike, or a pattern of lower inventory. The latter is seen when looking at CarMax's inventory. Leading up to and/or during March of every year since 2015, there was a decrease in the number of cars listed on CarMax's website.
As for demand, data can't read the minds of consumers (yet...?). But, from a human perspective, there might be two reasons why people would want to buy a used car in March: tax refunds and weather.
Right around now, the early tax filers — AKA the Ned Flanders of the world — are getting their rebate checks. Whether that check is for $5 or $5,000, it could be put towards a major purchase, and Uncle Sam refunding his loan to a consumer in need of a car might be the cash flow she or he needs to purchase a vehicle.
In terms of weather, CarMax has dozens of stores in temperate climates. When the weather is nasty — whether it be snow or frequent rain — people might be less inclined to take a Sunday trip out to test drive a car. Then again, the country is experiencing a frigid March that is breaking records in some states and cities, so this might not be a perfect explanation of increased demand.
Although theory may not equal practice, and there is probably more to this story than this simple theory, the data says that this decrease in inventory is happening at the same time as an increase in price.
But wait: buy a used car now if you want less miles on it
Some people can't wait an extra month to buy a used car and need one now. For them, they can take solace in the fact that they'd be buying, on average, a car with less miles on it than usual.
The average used car listed on CarMax as of March 3 had 37,871 miles on it. The last time that average was at the 37.8k level was in May of 2018.