Used vehicles become a newly appreciating asset

Like many retailers, Zeigler Auto Group of Michigan has always had a policy of turning used vehicles quickly because used cars and trucks depreciate in value as they sit on the lot.

Or at least they used to.

"We are now off of doing that because [used vehicles] are appreciating," company President Aaron Zeigler told Automotive News. "And we believe that they're going to continue to appreciate moving forward with the lack of new cars."

Zeigler and other dealers are living through an unprecedented time in the used-vehicle market. A perfect storm of factors has led to high demand and low supply — and skyrocketing wholesale values.

In April, those values have surged to record levels, market trackers say. Dealers are buying used vehicles at auction for eye-popping amounts — sometimes even more than the car's original sticker price — even as they scramble for other ways to obtain used-vehicle inventory.

While wholesale prices are expected to remain at this peak for another month or two, they also may have shifted upward for the foreseeable future, simply because there are fewer cars and trucks in the U.S. to sell.

The new-vehicle shortage is a key factor, but it joins others. Government stimulus, tax returns and extra savings by Americans who did less discretionary spending during the pandemic have spurred demand. Overall economic recovery in the U.S. and the resumption of more public activities also are contributing, market experts said.

Those factors alone would power a strong used-vehicle market. In addition, credit conditions have become more favorable this spring, said Cox Automotive Chief Economist Jonathan Smoke, who pointed particularly to rates for subprime borrowers.

"Prior to this scenario, if you were to dream up the most extreme definition of stimulated demand corresponding with very limited supply, I think you would have ruled out what this spring looks like as being impossible to ever happen," Smoke said. "Because quite literally we're seeing every possible way that strengthens demand coming to fruition."

It's happening as there are fewer cars to sell. Used-vehicle supply last month was 18 percent below that of March 2020 and 16 percent below March 2019's level, according to Cox. The industry's days' supply of used vehicles dropped throughout March and ended the month at 33 days, down from 48 days in February.

At the same time, wholesale prices rose for 16 consecutive weeks through April 18 — up 29 percent for 2021 so far and 17 percent above a previous all-time high set last August, according to J.D. Power.

"We are certainly in unprecedented times," said David Paris, executive analyst at J.D. Power. "The used-vehicle market is hotter than ever, and prices are at their highest levels ever recorded."

The situation means dealers are paying what were previously unthinkable prices for badly needed used-vehicle inventory.

On a Friday this month, Jason Pettigrew, used-vehicle manager at Cain Toyota in North Canton, Ohio, bought 16 vehicles at auction. For the cars 2 years old or younger, Pettigrew paid their full original sticker price.

Cain Toyota typically has 190 to 220 new vehicles to sell.

"We have 47 on our lot right now," Pettigrew said. "The buyers are still coming in, but we don't have the inventory for it. So the only thing we can do is sell cars that are going to be built, or are on their way in, or we flip them to a used car."

Ken Ganley, president of Ganley Auto Group in Ohio, said his managers used to get nervous when a used car would hit 50 days on the lot. But days-to-turn is meaningless as of late.

"I'm amazed every day at a car that my management team and I would all agree is a $10,000 car, and then we could quickly sell it for [$13,500] or [$14,000] on a wholesale basis," Ganley said. "You say, 'Geez, what's going on here?' "

Smoke said last week to expect six to eight more weeks of rising prices. Beyond that, higher prices and lower inventory are the new normal for the wholesale market for the foreseeable future.

"I don't think we're going to see the wholesale market resemble anything like 2018 or 2019 likely until we're in the year 2025 or later," Smoke said.

That's because of a smaller vehicle park.

"And that car park is not going to kind of magically grow in the next two years," Smoke said, "because no one is expecting new-vehicle production to be above the level that would produce sales."

J.D. Power's Paris also expects prices to remain elevated for the long term — probably the next year or two.

"All of this used supply that's going to be coming back to the market — everything's kind of banked at this point," Paris said.

Retailers are seeking used vehicles in a variety of ways and trying to lessen their dependence on higher-cost auctions.

AutoNation Inc. CEO Mike Jackson told analysts last week that the nation's largest new-vehicle retailer has mostly steered clear of auction lanes.

"Nearly 90 percent of our pre-owned vehicles retailed in the first quarter was self-sourced," Jackson said.

AutoNation is now purchasing more than 5,000 vehicles a month directly from consumers, Jackson said, and the company aims to expand on that.

Cain Toyota's Pettigrew said he's "trying it all" to find quality used vehicles to sell, including calling private sellers with vehicles parked on the side of the road and stepping up the store's trade-in offers.

"It's better than going to the auction, paying the fees and paying the shipping and overpaying for the car," Pettigrew said. "That's pretty much all I can do until the prices drop a little bit."

Melissa Burden contributed to this report.