Guest commentary: The state of the used-car market is survival of the fittest

For those buying or selling a used car in the current market, things may feel uncertain.

The current used-car market is characterized by a lack of inventory, high-interest rates and changing consumer behavior. For those looking to buy or sell a used car, it can feel uncertain and challenging to navigate the evolving landscape.

Inventory challenges will continue to persist for the foreseeable future. With 85 percent of previous lessees purchasing their vehicles, there are fewer used cars available for resale. Consumers are extending their current lease term or purchasing the car outright. Combine that with no supply because of the 2020 halt in vehicle production and ongoing chip shortage, the used-car market is still feeling the effects of the past four years. Data from Polk Automotive Solutions shows that lease penetration has been on a steady decline since 2019, dropping to 19 percent in 2022.

During the height of the pandemic, dealerships were able to sell cars quickly, without worrying about floorplan interest rates. Today, consumers are not willing to pay the prices they once were. But now with little inventory and rising interest rates, dealers are facing challenges that may hinder their business.

Consumer interest rates are as high as 9 percent, leaving many buyers on the sidelines. The same interest rates are also affecting dealers' floorplans, leaving them to hustle to move their cars off the lot. This requires more than just marketing — dealers need to go back to the basics by focusing on their talent. Having the right sales team and a consistent sales process is the key to attracting customers and closing deals.

The average new-car payment is $780 per month, leaving a segment of customers on the sidelines waiting for interest rates to fall. As average car payments continue to skyrocket, more and more customers are going to buy out their leases. Loyalty to a particular dealership or brand is becoming nonexistent, a theme we are seeing most prominently in states such as New York and California because of high lease penetration. That said, different areas are less affected; for example, in states such as Florida and Texas, we are finding customers are more likely to take out financing deals. Dealerships need to focus on customer loyalty and retention to ensure repeat business and a steady flow of sales and service.

Dealerships can still adapt and find ways to thrive in this market by focusing on customer loyalty, effective marketing strategies and building a well-trained sales team. The bottom line: To succeed in this environment, there needs to be a laser focus on loyalty.

Even with continued inventory challenges, dealers and brands need to offer more personalized incentives to existing customers to secure loyalty and future business.