Used-car pandemic hangover could last for years

With consumer demand flourishing, dealers need cars to sell. So as automakers struggle to build new ones, retailers are doing everything they can to acquire used vehicles for their lots.

"It's to the point of putting flyers on windshield wipers in malls," said John Luciano, president of Street Volkswagen in Texas. "Every store in the country has had to get in acquisition mode — everybody."

There are many factors affecting the used-vehicle market, but one key variable for it to return to seasonal norms — and for dealers such as Luciano to feel some kind of relief — is that automakers need to assemble more vehicles. That ability has been hobbled by the pandemic shutdowns and shortage of microchips. But what about the vehicles that were never built?

The dearth of near-new vehicles that will result from the production shortfalls will have a "significant effect" on the used-vehicle market going forward, said Dale Pollak, founder of vAuto inventory management software and executive vice president of Cox Automotive.

Pollak pointed to all the new cars and trucks that normally would have been leased in recent months and set to return to auctions two or three years later, as well as the vehicles that typically would have gone into fleets, such as those sold to rental-car companies. Instead, those vehicles are nonexistent, or at least in very short supply.

"Those are two giant, giant pipelines of supply for the wholesale market that are empty — largely empty," Pollak said.

Luciano noted that rental-car companies are even buying from dealers to build their fleets. Four vehicles he sold on trading platform CarOffer were all to a major rental-car business, he said. And the rental companies, which normally would be unloading their vehicle fleets at wholesale auctions, instead have been showing up at auctions as buyers.

At many dealerships, new vehicles are noticeably absent from the front of lots. And across the U.S., total inventories were down by about 57 percent in August from the year prior, according to Cox Automotive.

Low inventories combined with such demand has converged to create a price frenzy on the wholesale side of the market.

Wholesale prices were up 45 percent this year through Sept. 19, according to J.D. Power. They appeared to be cooling off this summer, but the sustained new-vehicle shortage, combined with the effects of Hurricane Ida, which flooded thousands of vehicles, sent prices back up in recent weeks.

According to CarFax, as many as 212,000 vehicles could have been damaged by the storm.

Retail used-vehicle prices were up 22 percent through Sept. 19. The most recent wholesale level is 4 percent above its previous peak in mid-June, J.D. Power reported, while retail prices were 1 percent higher than their previous peak in July.

The relative low numbers of new vehicles produced during the past 18 months likely will keep prices elevated well into the future, experts told Automotive News. Seasonality, or when the market follows traditional value trends throughout a given year, could still be more than two years away. And even then, the low vehicle production numbers of 2020, 2021 and perhaps beyond will take their toll.

"This late-model used-car shortage is going to be here for years — years — and there's nothing you can do about it," Pollak said. "You can't manufacture late-model used cars overnight. They've got to be built, [they've] got to be sold, [they've] got to be used."

When new-vehicle production returns to whatever levels become the new normal levels, automakers are likely to supply dealerships first to feed retail demand. Then they'll turn to the commercial customers. Once those pipelines are filled, it will still take another six to 18 months for those cars to become used vehicles, Pollak noted.

Cox Automotive estimates the industry's overall supply of unsold new vehicles in August was 1.4 million lower than in the same period in 2020 and more than 2.5 million below where it was at the same point in 2019.

David Paris, senior manager of market insights at J.D. Power, said that in the next year, the typical level of 12- to 18-month-old vehicles is "just not going to be there."

That vintage makes up a large portion of what dealers tap for used cars and trucks ready for the fronts of dealership lots and that they can sell as certified pre-owned vehicles.

Already this year, the supply of 1-year-old vehicles is down 40 percent year over year, according to J.D. Power.

And in two to three years, there will be significantly fewer off-lease vehicles returning to dealership lots, Paris said.

"Used supply is going to be a huge issue here for the next three years as we kind of work through this," Paris said.

J.D. Power forecasts that used-vehicle supply will go down in 2022 and in 2023, when it will bottom out, before normalizing or at least turning back up in 2024.

Paris compares it to a ride down a playground slide — the current market is like the top of the slide. There will be little ups and downs, but used-vehicle prices should begin to cool off staring this fall and then stabilize in 2024. "So it's going to be a very long, drawn-out process," he said, calling it a "long slide down back to what we consider to be normal, healthy levels."

Chris Ourisman, a Washington-area dealer and president of Ourisman Automotive, noted that the used-vehicle market is still far larger than its new-vehicle counterpart.

"So I don't think it would be the same impact that we're seeing today for new-car issues," Ourisman said. "But this certainly has to have ramifications down the road and being able to source pre-owned vehicles."

But many factors driving the used-vehicle market are outside of dealers' control, so all they can do is watch the macro trends and adapt accordingly, he said.

The last time there was a meaningful shortage of new vehicles in the U.S. was more than a decade ago during the Great Recession. But lessons cannot necessarily be gleaned from the aftermath of that period because there was so little demand then, noted Cox Automotive's Pollak.

"This is a situation that's kind of reverse: We have plenty of demand and just don't have supply," Pollak said.