Worries loom for used-car market

Dealers are wary about their used-vehicle prospects in 2023 after worsening market conditions led used-vehicle sales to tumble last year. But while used-vehicle sales are expected to drop again this year, dealers and used-vehicle experts don't expect the hit to consumer demand and profits will be severe in early 2023.

Shoring up that viewpoint: Wholesale used-vehicle prices are down significantly from last year's record highs, but they have not crashed. New-vehicle supply has somewhat improved at the start of 2023, but until fully recovered, the need for used vehicles remains elevated. Even so, major concerns loom, and many dealers say high retail prices and rising interest rates create a one-two punch that will further discourage consumers concerned about affordability and potentially shut more of them out of the market altogether.

The risk to sales volume and profits in 2023 has led dealers to step back and reevaluate the used- vehicle business strategies they put in place in 2021 and early 2022, when consumers had more cash to spend, interest rates were lower and weak new-vehicle supply inflated the importance of and the opportunity for used vehicles.

"My opinion of 2023 is going to be dismal compared to what we just had, which was a super high point," said Brandon Groves, owner of Sherwood Groves Auto Group of Towanda, Pa., near Scranton.

The used-vehicle market shifts compelled Groves to start retailing older used vehicles with higher mileage — something his dealership group usually doesn't do. But he is seeing more cash-strapped shoppers seeking less costly, higher- mileage cars and trucks.

"I normally wouldn't, but we sold a 2015 Ford F-250 with 80,000 miles on it the other day," Groves told Automotive News.

Richard Fitzpatrick, dealer principal of Crest Lincoln of Woodbridge in Connecticut, said he is seeing more potential buyers push off buying used vehicles for two to six months on the hopes that interest rates recede to a more comfortable level.

But even with that consumer uncertainty, used vehicles remain a critical part of business in 2023, said Fitzpatrick.

He told Automotive News he is doubling his dealership's efforts to increase used-vehicle volume — even at the cost of per-vehicle gross profit declines. He also is retailing older used vehicles, including some acquired when wholesale values were higher. Those values have fallen in the last four to five months.

"We have major emphasis, major incentives for our sales team [members] who sell used cars," Fitzpatrick said.

Sales of used vehicles in 2022 dropped to a nearly decade-long low. And experts forecast that volatile economic conditions and consumers' resulting affordability concerns are likely to push used-vehicle volume down further in 2023.

Used volume in the U.S. fell nearly 11 percent to an estimated 36.2 million vehicles in 2022, Cox Automotive's auction unit Manheim said in early January. That is the lowest overall used-vehicle sales number since 2013 when about 35.8 million vehicles were sold. Retail used-vehicle sales also fell, dropping nearly 10 percent to an estimated 19.1 million vehicles last year, the lowest retail performance since 2016, according to Cox. Exact figures for 2022 will be finalized in February after registration data for the year is fully in.

Those declines indicate a market environment that has significantly changed since 2021, when robust demand and favorable economic conditions propelled used sales to a record 40.6 million vehicles in total and 21.2 million vehicles at retail.

More than 70 percent of dealership executives responding in Automotive News' 2023 Dealer Outlook Survey said the shifts in the used market in 2022 hurt business. And they accordingly are reevaluating their used-vehicle plans for this year.

For 2023, Cox is forecasting that used-vehicle sales will drop to 35.6 million vehicles overall and 18.9 million vehicles at retail.

The outlook has dealers adjusting their growth plans and operational strategies for the used business in 2023. About 70 percent of respondents in the Automotive News survey said they are making such changes. The most common changes reported are accepting less gross profit per vehicle, reducing the amount paid for trade-ins or other wholesale inventory acquisitions and cutting their retail used prices.

But they still are counting on the used business. More than three-quarters of respondents said they will retain a greater emphasis on their used operation even after new-vehicle supply normalizes.

A big question for 2023 is what happens to demand.

The number of days it takes used vehicles to sell at franchised dealerships has ticked up to about 42 days — evidence that demand is somewhat weakening, said Jonathan Banks, general manager of vehicle valuations at J.D. Power.

Still, when viewed from a historical standpoint, used-vehicle inventory is turning quickly, Banks told Automotive News.

Similarly, prices are falling, but from a historical standpoint, they remain "exceptionally high," he said.

"There hasn't really been seasonality, per se," Banks said. "It's just [that] prices are dropping off of that huge peak that we've been at for several years."

Dealers purchasing used vehicles in 2023 can expect price depreciation to continue, though at a more moderate pace than the declines seen in June through December last year, Banks said. That price depreciation could slow with the onset of tax refund season, which is typical each year, he said.

But softness in the retail market could persist as dealers choose to pay less to acquire vehicles and demand wanes, he said.

For Groves, it seems that a metaphorical switch was flipped at the end of 2022, particularly in October and November.

"When you watch new-car lots — mine, anybody else's — start to pick up on inventory, then you just know that the pendulum is going to swing back," he said.

Slightly higher new-vehicle inventory in 2023 may ultimately provide a critical boost to the used market, said Thomas Castriota, dealer principal of Castriota Chevrolet in Hudson, Fla.

With new-vehicle production so snarled in 2020, 2021 and 2022, off-lease vehicles are not flowing back into the market. The loss of those vehicles in the used pipeline will be partly compensated when vehicles that are new today get traded in, Castriota told Automotive News.

But affordability concerns weigh heavily.

"In our particular store, we're seeing more of our lease customers buying their cars, because they can't afford a new lease payment at substantially more dollars than where they were maybe three or four years ago," Castriota said.

The average consumer lives paycheck to paycheck, and most can't afford the higher costs, he said.

Said Castriota: "If they're living paycheck to paycheck, you can't say 'Well, now your payment is going to go up $300.' That's not in their economic sphere."