Used-vehicle market to continue to soften in 2023

Wholesale used-vehicle price depreciation has made a comeback, and prices are on track to keep softening this year.

"We think 2023 will be interesting," said Jonathan Banks, vice president of used-vehicle valuations at J.D. Power.

Banks presented his used-vehicle outlook for the year Thursday at the J.D. Power Auto Summit in Dallas.

"Obviously, a lot of different nuances will impact prices," he said. "Ultimately, we think it's going to be another great year — just a challenging year."

Wholesale prices are coming down from record highs logged in 2021 and early 2022. They aren't plummeting so much as they are getting closer to "where they should be," Banks said. Average wholesale prices — which ended 2021 at about $26,600 and 2022 at about $24,700 — will decline another 11 percent by the end of the year, Banks estimated.

He does not believe accelerated depreciation is indicative prices are going to fall off a cliff.

"There's no way, from our estimates, that we're looking at a used market that's going to be not profitable and not a great area to be," Banks said.

Wholesale declines still contrast used-vehicle retail prices. Though those remain elevated, retail gross margins were down to $1,409 at the end of 2022 — nearly to pre-COVID levels, Banks said.

Multiple factors — including higher new-vehicle incentives, higher new-vehicle supply, higher interest rates, weaker economic conditions and reduced used-vehicle supply — stand to push used-vehicle prices lower in 2023, Banks said.

Wholesale supply of 0- to 5-year-old used vehicles will tighten, Banks said. He estimated that specific volume will be about 14.1 million in 2023. It could ultimately fall to 13.5 million in 2024 and 12.7 million in 2025, he said.

And 3-year-old vehicle supply will decrease more than the overall supply market, he said.

"That wonderful 3-year-old [vehicle] that's been taken care of meticulously by the lease buyer is declining more than the overall pool," Banks said.

Banks noted he is slightly concerned about that slimmer supply of used vehicles. Still, there is a caveat he is considering: Conditions in the last few years taught dealers to become better at acquiring inventory. Dealers have and will continue to find inventory options other than wholesale auctions — such as direct consumer buys — in 2023, Banks said.

The other big thing to keep in mind, Banks said, is affordability, which has become a larger point of discussion amid still-high retail prices and rising interest rates.

Several automakers have shifted to manufacturing more expensive vehicles. When those return to the market in 2023 and 2024 as used vehicles, they will be going up against a consumer profile that has vastly evolved from 2021 due to inflationary pressures, Banks said.

There's "no way" dealers are going to be able to push price increases on consumers like they did before, Banks said. In 2023, they are likely going to want to think about having the right mix to align with this new consumer profile, which may include adding a larger number of reconditioned vehicles, he said.