Could hot used-vehicle market lead to burns?

After used-car sales reached record volumes in 2021, strong demand — and the higher price tags attached — will stick around for 2022.

That means dealers will go to great lengths to source used cars and trucks to stock their lots this year even as they continue to benefit from pricing power and higher profits amid the industry's persistent new-vehicle shortage. But facing another year of scarcity and soaring prices, some dealers are worried about the longer-term impacts of changes in shopping patterns or customers carrying too much debt.

For instance, high prices could cause consumers to hang on to their vehicles longer, and that could hamper the flow of used vehicles coming back to the retail market, dealer Troy Duhon told Automotive News.

"It's not evident yet, but my concern is, with the rising transaction prices, will that cause the average trade cycle to go from three and a half years to five years?" said Duhon, president of Premier Automotive Group, with 28 stores in Louisiana, Texas, California, Kansas and Missouri.

Pennsylvania dealer Corina Diehl is uneasy about what could happen when new-vehicle flow normalizes, taking the pressure off used-vehicle supply. Prices will eventually go back down, she predicted, and that could create a situation in which the consumers currently paying oodles of money for higher- priced used vehicles will get hit where it hurts — their wallets.

"They're going to be coming back to me in three or four years, and they're going to take a hit," said Diehl, CEO of Diehl Automotive Group, with six stores in western Pennsylvania and eastern Ohio. "They're going to be upside down. That's what scares me looking forward."

But for 2022, dealers shouldn't have to worry about their stores or customers getting pinched in such a way, Cox Automotive Chief Economist Jonathan Smoke said.

"We do not believe that the fundamental ingredients are in place to see a major price correction," Smoke said this month. "That would require a collapse in demand, which isn't likely, given the macroeconomic backdrop. We need to see a surge in supply, and that's not going to happen in new or in wholesale."

Smoke said used-vehicle supplies are likely to remain under pressure even beyond 2022 as reduced new-vehicle production in 2020, 2021 and 2022 cuts down the number of vehicles available for the used-market pipeline in subsequent years.

With the plethora of supply interruptions hampering vehicle production last year, dealers found consumers snatching up the new cars that did make it to their lots. Those conditions helped propel U.S. used-vehicle sales in 2021 to records of 40.9 million overall and 22.3 million at retail, according to Cox Automotive estimates.

And those records may not be easily topped. As inventory levels start to stabilize in 2022 as automakers shore up production challenges, consumer demand for used vehicles may ease slightly, Cox analysts said.

Cox estimates 2022's overall volume will drop to 39.3 million. Of those, an estimated 22.1 million could be retail sales. The volume drop is generally expected in the second half of the year.

Wholesale used-vehicle prices also set records in 2021, with surges in both the spring and fall on the Manheim Used Vehicle Value Index, which tracks sales at auction giant Manheim's U.S. locations. The index's December 2021 level was 47 percent higher than December 2020, according to Cox.

Wholesale prices may fluctuate only slightly this year. Cox forecasts that the Manheim index could hit new heights in the spring — prices normally peak during that season. The index is then expected to soften in the back half of the year and finish 2022 down slightly from 2021.

Retail sales of used vehicles, including certified pre-owned cars, slowed at the tail end of 2021, said Tom Kontos, chief economist at KAR Global, parent of auction giant ADESA. If used vehicles had been in better supply, that volume might have been even stronger last year, Kontos said.

Securing inventory is no easy task these days, but Diehl said her plans for acquiring used vehicles this year echo what she did in 2021 — sourcing through trades, buying out leases and offering to purchase consumer vehicles.

And she anticipates demand will continue to be strong. With new vehicles "going for sticker and above, I think people seem to find used-car availability a little easier," Diehl said.

At Premier, which ranks No. 52 on Automotive News' list of the top 150 dealership groups based in the U.S., the high wholesale prices have Duhon and his managers contacting smaller lenders — credit unions and local banks — to try to make deals to acquire vehicles being repossessed.

Duhon also has empowered the sales organization to source vehicles. Those employees are allowed to brand themselves as buyers for the dealership group and use social media platforms such as Facebook and Instagram to let consumers know a local dealership will buy from them.

"One of the cool things we've done is create a culture of salesmen buying cars off the street," Duhon said.

But Duhon is still braced for dwindling availability of used cars. He can see consumers putting off purchases and keeping their current vehicles longer because new-vehicle prices are so high. For that matter, they may not even want to switch to later-model used vehicles, as those cars also carry heftier prices than in years past.

And budget shoppers will be especially challenged, Duhon said, as finding a later-model used vehicle priced under $15,000 may be "almost impossible."