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Car value depreciation has 'defied gravity' in the past two years: CoPilot CEO

CoPilot Founder and CEO Pat Ryan joins Yahoo Finance Live to discuss the state of the used car market and how prices are shifting back to normal for buyers.

Video Transcript

- The used car market appears to be cooling after an unprecedented two years of high prices due, of course, to factors like inflation and the chip shortage. Well, CoPilot, a car expert app, has tracked the quote "return to normal index for used cars." Founder and CEO of CoPilot, Pat Ryan, joins us now with those numbers.

So good to have you on the show, Pat. For people who are trying to understand this, this is about what the used price of your car would have been if not for these pandemic and these last strange few years versus what it is now. What it would have been right now. Break that down for us. And why should we be looking at this metric?

PAT RYAN: Well, first of all, a big part of inflation-- almost 32% of inflation as it was rising, came from car prices going up. So it's a huge factor in CPI. If you care about CPI. If you're looking to buy a car, last month cars were up in July. At the end of July, August 1st. Cars were up about 39% over what they would normally be. 39% above normal, we've never seen anything like it.

And it's starting to soften. For the first time, we're seeing it soften. But it's happening in a very interesting way. We're seeing higher price payment prices because of interest rates. And that is causing dealers to drop to drop their prices. So the average price was up 39% above normal a month ago. Now it's only 34%. So we're starting to see prices soften for the first time in a long time. And yet, we're not seeing demand soften. There's still a lot of demand. Consumers are buying cars. There's a lot of pent up demand because of the chip shortage. And because a lot of people were waiting for prices to drop.

We're finally seeing them drop. But this is just the beginning with another Fed rate increase around the corner, you're going to see more dropping as time goes on. And this is going to be an important market to keep a pulse on. It's a great time to sell a car. But boy, if you want to buy, you might wait. And if you wait, odds are you're going to see better prices as we get into the winter.

- Pat, I guess how much better are the prices are going to be? When we talk about the decline in prices, are we going to see a dramatic drop?

PAT RYAN: Yeah. I mean, you know normally cars depreciate. Cars aren't like stocks. They don't go up. The last few years, they've defied gravity. That's changing. We're seeing that drop. We're seeing the return to normal start. And of course, it's starting to accelerate because of interest rates. So as you can see from the data on the screen, there's really an incredible premium here. But we saw those one to three-year-old cars drop almost 2% in one single month. So we look to see that happening throughout the fall into the winter. And there's no question that the return in normal has started.

Now the real question will be is are we going to a new normal? Or are we going back to where we used to be before? And it's too early to say the answer to that.

- Yeah. Still a long way to go with 34% above that normal price. Are we seeing it across categories? SUVs? EVs? And when do you think new cars will begin to come down?

PAT RYAN: Yeah. It's a great question. So the first answer is that EVs really ran up. With fuel prices, we saw some softening in SUVs and trucks. Not as much as you'd expect. And that's because there's good fuel economy. And the consumer is still in a really strong position. Salaries are strong. Employment is strong.

So we didn't see the softening in SUV and trucks as much as you expect with those high fuel prices or high interest rates because they're on average more expensive. But we did see a skyrocketing of EV prices. And those are starting to soften. They're down about 6% month over month. I think they got ahead of themselves. And we're starting to see EVs soften. But you're going to see more and more across the board. I think there's no question that across the board on used cars. We're going to see softening month over month for the next three or four months at a minimum.

And to your point, we're not quite seeing the new car volumes. They're hit and miss depending on the manufacturer. But people are starting to say that things are going to be-- they can see some visibility and return to normal. We're not there yet. And as that starts to happen, you're going to see even more acceleration. We're seeing this acceleration frankly without new car supply picking up yet. It's now nowhere near normal.

So if it's dropping now, as new car supply starts to get better, which is forecast for the winter, I think you're going to see used car prices-- the decline accelerate

- I still seeing a lot of empty lots around the country. CoPilot founder and CEO, Pat Ryan, thanks for being here. Appreciate it.