Used car prices have been high since the early days of the COVID-19 pandemic. The global health crisis and supply chain problems caused a shortage of new cars, which led to limited supply and record-breaking prices. As a result, people turned to the used car market, further driving up prices due to the costs and scarcity. However, experts now see signs of change. Wholesale prices for used cars have started to come down, which could mean that consumer demand is weakening. Factors like the current economy, higher interest rates, and increased monthly payments for budget-conscious buyers all play a role in this shift.
In this article, Randy Barone, Vice President of Business Development at ACV, and Doug Hadden, ACV Vice President, offer valuable insights into the factors influencing used car prices, the impact of new car production, and their outlook for the used car market in 2023.
CBT News: Retail used-vehicle prices now average $26,510, according to Kelley Blue Book. Do you think used car prices will continue to fall in 2023, or was the month of February an outlier?
Randy Barone and Doug Hadden: Inflated used car prices have started to come down at the wholesale level, suggesting that consumer demand may also have slightly softened. This softening may be due to the current economic environment, impact of higher interest rates and higher average monthly payments, especially for the more price-sensitive consumers. While these are patterns typically seen in the used car market in times of expected or active recession, the wholesale sector remains strong because dealers are more willing to wholesale vehicles as opposed to holding onto that inventory.
It’s also important to consider how prices will be impacted as more brand makes, models and styles become available, particularly on the side of electric vehicles. Broader availability of SUVs, sedans or trucks, coupled with a customer base that’s more open to a new variety of brands, may also impact how vehicles are priced.
NADA data shows that the average retail selling price of a vehicle in a dealer’s inventory is $30,796, which is up from $19,800 in 2016. We are still in a used car shortage and will continue to see prices on the more popular makes and models remain higher. Buying vehicles from consumers and buying from the right sources that conduct more in-depth inspections will keep missed reconditioning lower, which can add to higher costs at market. The reliable “bread and butter vehicles” in the lower price ranges are owned by consumers, and the best approach to lower your average retail selling price is to buy vehicles directly from consumers, trade for more and buy vehicles out of service.
CBT: What factors drive the valuations of used vehicles?
RB and DH: There are several factors that drive the valuation of used vehicles, the most well-known being: age of the vehicle, mileage on the vehicle, vehicle condition, and history. Another factor that many car shoppers likely felt over the past few years is demand. There was a sharp rise in used vehicle prices during the pandemic as the chip shortage caused a delay in the delivery of new vehicles, sending car buyers to the used car lot. New car production is picking up, and we’re experiencing a softening in the economy that is leading to decreased vehicle demand and a downturn in used car prices.
ACV has a suite of tools that increases the transparency behind vehicle valuations, making sure that dealers are able to drive their bottom line by demystifying the connection between condition and value. Through ACV’s Max Digital product, real time retail data was introduced to our growing data moat. Paired with their Vehicle Condition Reports, which has features like AMP® (Audio Motor Profile) and Virtual Lift® using ACV’s proprietary technology, dealers have the most in-depth data for accurate vehicle valuations.
The focus on buying from better sources and making better decisions will continue to be a driving force in vehicle valuations. Buying from sources with poor inspections, like a very subjective score of a 2.9 or 3.1, exposes the dealer to items missed, and they may end up having to spend more in reconditioning. Buying from consumers gives the dealer the ability to inspect a vehicle in greater detail and not pay for transport or fees, plus the consumer remains very close to every vehicle purchased. Buying from sources with robust and transparent inspection services like ACV also gives the dealer an advantage to really nail down what will be their real cost to market right when they make the purchase without all the mystery.
CBT: Prices for certain car brands remain high—why?
RB and DH: On the new car side, due to lingering supply chain issues, OEMs have shifted their production focus to higher-end vehicles that will bring in more profit. On the used car side, certain vehicles have such high demand due to lower new car production that the pricing for the used model has surprised their newer counterparts.
CBT: Which brands stand out as having particularly high used car prices?
RB and DH: We’re seeing lower price vehicles right now in almost all makes and models. Ford, GM and Dodge trucks are bringing a premium. Toyota and Lexus SUVs, especially hybrids, are doing very well.
CBT: What is your 2023 outlook for the used car market as a whole?
RB and DH: The used car market will be strong even as the new car inventory shortage lessens. Current year models and 1-year-old vehicles have the most volatility particularly if the manufacturer continues to produce newer models. To move those 0–1-year-old models, dealers will need to begin providing incentive to move the inventory off the lot and make room for the newer options. We’re already starting to see dealers buried with current and 1-year-old models. The offer of “0% down and a discount” for the newest year models make it incredibly hard to own a later model with a high down payment and high interest rate.
There are, however, unknown factors to consider as we navigate this new normal. Will manufacturers continue to turn out inventory as they have in the past few decades? Will they be filling retail dealers’ lots with excess inventory, necessitating large rebates and moving to commercial fleet sales to keep production up? Will they keep a smaller day’s supply on the ground, which will negate the need for profit taking actions? Only time will tell.
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August 07, 2023 at 04:03PM
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The state of used car prices: why are certain car brands so high? - CBT Automotive News
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