Why there will not be a return to “regular” for the used automotive market

Customers browse a used car lot on February 15, 2023 in Glendale, California.

Mario Tama | Getty Images

All new vehicles become used cars and trucks after sale.

It’s an obvious statement, but one that must be construed to explain the root cause of ongoing inventory and pricing problems in the US used vehicle market, which has been a barometer of the country’s inflation levels.

During the outbreak of the coronavirus pandemic in early 2020, automakers shut down factories for weeks to halt the spread of Covid-19. It was an unprecedented action that eventually led to additional supply chain issues such as: B. a persistent shortage of semiconductor chips that has caused factories to shut down production again for weeks, if not months, in recent years.

The lack of production meant fewer new vehicles became used models for consumers to buy, leading to inventory shortages in both the new and used vehicle markets, as well as record prices due to robust demand.

It’s been three years since those initial plant closures, but American consumers — like the Biden administration — hoping the used-car market will return to “normal” pre-pandemic levels shouldn’t hold their breath.

A notable fall in used car prices late last year was roughly halved in 2023 as inventories remain significantly low following disruptions in vehicle production. There was also an unusually large number of consumers buying up leases to avoid skyrocketing car prices and rising interest rates.

“It looks like it’s going to be around for some time,” said Chris Frey, senior industry insights manager at Cox Automotive. “It’s really a function of this hole in new production that creates a dynamic where wholesale or general-use values ​​are higher because there are millions fewer new vehicles that would eventually turn into used vehicles.”

Cox Automotive reports that wholesale prices for used vehicles are up 8.8% this year through mid-March, according to the Manheim Used Vehicle Value Index, which tracks vehicles sold to dealers at auction. Prices are trending higher and the index is getting closer to the record high of 257.7 basis points set in early 2022. In mid-March it was 238.6.

The stock of used vehicles is down 21% year-on-year and a whopping 26% from the pre-pandemic level of 2.8 million available vehicles in 2019. Cox Automotive does not expect total used car sales to return to pre-pandemic levels of about 38.2 million units until at least 2026, Frey said.

Adding to the production hole is a modification of the lease. Cox reports a 20 percent increase in consumers who bought their vehicles rather than traded them in from 2019 to 2022. The increase is due to the fact that the residual values ​​of the vehicles were in some cases well above expectations, making it significantly cheaper to buy the vehicle than to lease another when prices are inflated and interest rates are rising.

“It’s still under a lot of pressure, just like last year,” said Benjamin Preston, an auto reporter for Consumer Reports. “Prices have come down a bit … but the bottom line is they’re just a lot higher than they were before the pandemic.”

Cox Automotive previously forecast wholesale prices for the Manheim Used Vehicle Value Index to fall 4.3% by the end of 2023 from December 2022. The company hasn’t revised that guidance, but may have to do so given rising wholesale prices.

Cox reports that the average list price of a used car in February was $26,068, the latest data available, down from last year’s records of more than $28,000 but significantly higher than the average of around two years ago $22,000. Retail prices to consumers traditionally follow changes in wholesale prices.

So what’s the solution? There is no other way than to increase the production of new vehicles in order to increase the number of future used models. Automakers are expected to ramp up production this year, but have also pledged not to overbuild like in the past.

“We are unlikely to return to pre-pandemic levels. Vehicles cost a lot more now,” Frey said in reference to used car prices. “The landscape has changed. [Automakers] don’t produce as many as they have because they’ve gotten the taste of gold – huge profits from not having as many vehicles in production.