Wholesale used-car pricing set to rebound

Barring any surprises, used-vehicle market analysts don't expect to see steeper wholesale price declines in the second half of 2023.

Price softening will continue to a degree in July following a second-quarter slump in wholesale used-vehicle prices that "erased" strong first-quarter gains in values, Cox Automotive Chief Economist Jonathan Smoke said during a quarterly call July 10.

But Smoke said he sees factors converging midyear that could fortify prices and the overall market. One factor is a supply crunch of younger, lower-mileage used vehicles that likely will keep a floor under prices, he said.

"I do think the worst of the used-vehicle market is upon us," Smoke told Automotive News last month. "I am optimistic that every month later this year will actually create strength in the used-vehicle market."

Wholesale used-vehicle prices fell 4.2 percent in June from May, according to Cox Automotive's Manheim Used Vehicle Value Index. Cox's Chris Frey, senior manager of economic and industry insights, said that is the largest index decline since an 11.4 percent plunge recorded in April 2020, when the COVID-19 pandemic was wreaking havoc.

June's sizable decline followed a 2.7 percent drop in May and 3 percent slip in April. However, Cox does not expect the remainder of 2023 to deliver declines like those, Smoke said.

The firm forecasts narrower wholesale price declines plus stronger-than-normal seasonal conditions, reflective of demand improving as said declines show up in retail pricing, Smoke said on the call.

Alex Yurchenko, chief data science officer for Black Book, said last month that depreciation could occur in the second half of the year, albeit closer to pre-coronavirus pandemic levels.

Scarcity of used vehicles less than 4 years old will continue to influence pricing.

When the pandemic impaired new-vehicle production in 2020 and 2021, sales into inventory channels that sustained the used-vehicle market — such as leasing and rental and fleet sales — fell dramatically. Though those prime volumes are in recovery, both Smoke and Yurchenko have said evidence of that downturn can be seen in used-vehicle availability this year.

Public dealership group Sonic Automotive Inc. last month cited lower used-vehicle availability as a partial factor in its decision to pare back the footprint of EchoPark, its used-vehicle-only business.

Sonic, like other players in the used-vehicle retail space, has hopes new-vehicle production increases during the next 12 to 18 months will gradually boost used-vehicle availability and improve both profitability and consumer affordability.

However, a possible UAW strike this year might impact new-vehicle production at some automakers, which could force franchised dealerships back into greater reliance on building up and selling from used inventories.

Yurchenko expects available used-vehicle inventory in the wholesale market to remain tight and reach its lowest point around 2025. Smoke's view is that the wholesale market is in the early stages of recovering to 2018 volumes by 2028.

Ongoing consumer affordability issues and improved new-vehicle competition have stripped the used-vehicle market of some of the demand it saw two years ago. Those factors — as well as uncertainty regarding a U.S. debt default and possible recession — disrupted sales through the first half of the year.
For now, though, it appears conditions that would prompt a wider slowdown in economic activity are not coming together, Smoke said.

Job growth is slowing, though it remains positive, Smoke said. For the U.S. to fall into a recession, the national unemployment rate would need to rise because of job losses, which is not happening and is highly unlikely to happen before year end without a "black swan event" that impacts economic stability, Smoke said.

"The risk of recession remains elevated above what it typically is in any given year, but now it appears concentrated to have an impact in the first three quarters of 2024," Smoke said.