It’s no secret that the last two to three years have seen unprecedented market dynamics resulting in record-high used-car prices. Everybody is familiar with the supply chain constraints in the new vehicle marketplace which precipitated the rise in used car prices. Right now is a transitional period for the used car market as we start to see improvements in new vehicle supply although not, perhaps, at the velocity we would like.
Market insights are essential to a successful remarketing strategy. One of the main tools we use to analyze market conditions and to project future ones is the used vehicle market indices published by Manheim. It is the barometer of what is happening from a wholesale market perspective. We also look more closely at our own segment – the wholesale fleet segment – through an index called Auction-net. For our purposes here, we will use the Manheim index.
So, let’s look at the index and we’ll share some insight behind this transitional phase.
You can see that in the first quarter of 2020, everything took an abrupt, sharp dive in a very narrow vertices. At the onset of the pandemic, everybody took pause. People pulled back on a lot of things. And, they weren’t buying cars. Basically, consumer sentiment was garnishing quite a bit of uncertainty. These conditions led to the chip shortage along with labor shortages in the plants.
Then you will see that in the fall of 2020 going into 2021, the index took a tremendous leap. With new vehicles at a premium due to the chip shortage, once the market picked up in late 2020, the used car market took an upward trajectory and the frenzy in the market was quite strong.
At the end of 2021, the index sat at 232. Now in January of 2023 and we are back down to 222 so we are 10 basis points down from the high and adjusting. We can see from an aggregate that the market is starting to turn. When you look at the index now, you can see that it has turned. People are just not replacing cars at such a high velocity. Unless they need to replace a car due to an event such as theft, an insurance claim or high-cost repair, people are keeping their cars. So, the market is beginning to cool off and hopefully we will see a return to what we refer to as ‘pre pandemic’ metrics.
You can also look at it from a transactional standpoint on each respective vehicle. So, as an example, if you expect 20K for a pickup truck and you’re only getting 18.5K, it is an indication of a downward pull in the market. If this trend is consistent within that class and type of vehicle, you can ascertain that pickup trucks are not as desirable as they were at the onset of the pandemic. People were doing a lot more home improvement and internal repairs because they were at home building offices and remodeling. Some of that activity has cooled off now and with the rise in fuel costs, pickup trucks are not as high in demand.
What is in store for the future?
Now that the used car love affair is over, what do we think the future holds for the market?
Although it is always hard to make predictions, some of the things that will impact the used car market will be housing, fuel costs, interest rates and overall consumer sentiment. If the housing market is strong, generally, the used vehicle marketplace along with the new is pulled along with it because there is more liquidity in the marketplace. Fuel prices are intricately tied to the car market and specifically the segment. The compact vehicle segment is stronger right now than the pickup segment.
As we look towards the onset of the spring market, we feel strongly the conditions will still yield successful results for our clients although selling prices may not be as robust as we have seen during the supply chain constraints of the past 36 months or so. There is no pause for concern. Rather, we expect a gradual adjustment back to the metrics we have seen in the years leading into the pandemic. So, what’s our “take-away” here? Well, we always have our eye on the market and the trends impacting it so that we are maximizing used vehicle sales values on behalf of our customers.