Used-car demand stays strong in spring but headwinds remain

Pent-up demand for used cars and trucks sustained sales and profits through the first quarter of the year and into the spring, for now assuaging some dealers' year-end 2022 concerns about a potential slowdown.

Still, caution is the word on the used-vehicle side. Though demand was healthy through the 2023 spring selling season, gone is the level it was at in 2021, franchised dealership leaders told Automotive News. They are monitoring factors that could dent sales.

One is the continuing rise of interest rates, which has consumers browsing with added concern about heftier monthly payments. Dealers are also contending with unremitting scarcity of desired late-model used-vehicle inventory.

Jim Farkas, general manager at Germain Honda of Ann Arbor, Mich., so far sees no dampers on buying activity. Though there are fewer people in the market for used vehicles, sales to those who remain are closing at a higher rate.

"There aren't as many shoppers, but there are still a lot of buyers," Farkas said.

Two other potential headwinds are more conservative lending approaches by banks, and higher costs and competition to acquire retail-worthy used-vehicle inventory, said Tom Moore, COO of Morgan Automotive Group of Tampa, Fla. Both factors pose challenges on the used-vehicle side of the business, he told Automotive News.

Even so, he said, robust retail demand from consumers persists.

"The used-car business, historically, is still very good," Moore said.

When wholesale used-vehicle prices fell during the second half of 2022, many dealers chose to hold off on stocking inventory because they didn't want to risk it declining on their books, said Chris Frey, senior manager of economic and industry insights for Cox Automotive.

However, once the spring selling season drew near, dealers began ramping up wholesale purchases, Frey told Automotive News. More dealers visited auctions to buy instead of trading among themselves, which helped drive up prices, Frey said. Cox Automotive's Manheim Used Vehicle Value Index — a measurement of wholesale used-vehicle prices calculated by tracking vehicles sold at Manheim's U.S. auctions and applying statistical analysis to those figures — recorded four consecutive months of increases from December to March.

Wholesale price appreciation slowed through April into May, Frey said. And for now, wholesale prices appear to be declining at the relatively normal levels that might have been seen in 2019, he said.

"With some of the [vehicle] age cohorts, it's continued to come down but I would say it's not precipitously falling," Frey said.

The values of vehicles Morgan Automotive sells at wholesale auctions instead of putting on its dealership lots went up significantly in the first quarter, which wasn't surprising, Moore said. So did the values of late-model used vehicles the group buys to retail; by February, those had more than stabilized, bumping up the costs to acquire them.

"Our first quarter started off great in retail used-car sales," Moore said.

Morgan Automotive, which has more than 60 dealerships in Florida, was up on a same-store used-vehicle sales volume basis by a "significant amount" in January and February, Moore said.

In March, the dealership group did see a small same-store decline in used-vehicle sales volume, Moore said. However, its overall used-vehicle sales volume was up about 8.3 percent year over year in March — aided in part by the store acquisition spree it has been on. Moore estimated overall used-vehicle sales volume was up roughly 10 percent year over year in April.

Moore attributed most of the March decline in Morgan Automotive's same-store used-vehicle sales to short supply.

"Our inventory levels are low at some of our stores, significantly lower than we would like them to be," Moore said. "Most of that's driven by the fact that the new-car inventory on some of our brands just simply hasn't come back as fast as everyone anticipated."

Farkas, who also is corporate used-car director for Germain Motor Co., said the strength of the market varies by brand and availability. The dealership group has 22 stores in Ohio, Florida, Arizona, Montana and Michigan, and nine used-vehicle buying centers have helped the group pad inventory during slumps in supply over the last two years.

Some models from brands that have lower new-vehicle supply or those that are not flowing back to dealerships as lease returns, such as Honda and Toyota, are still appreciating, Farkas said. Those continue to sell similarly to last year. But models from General Motors, Mercedes-Benz and BMW, which have new vehicles more readily available, are tending to depreciate more and are not selling as fast, he said.

Not only that, but affordability-minded consumers continue to buy out their vehicle leases, Morgan Automotive's Moore said. The dealership group expected that to slow down, but it hasn't, he added.

"That off-lease inventory just isn't there so that's affected used-car supply as well," Moore said.The market is stronger than expected for vehicles under a $30,000 market value, according to Farkas. Vehicles worth more than that are depreciating faster than anticipated, he said.

Germain sold about 4,900 used vehicles through May 10, up 4 percent from last year. Farkas' own store is up 11 percent from last year. Overall, the group has a "healthier" supply of inventory than this time last year, he said.

Farkas said fluctuating new-car production and interest rates could be key influences on the market through the remainder of 2023, but he's not too worried.

"I feel this year will be steadier than last year," he said. "I'm very optimistic about what the rest of this year looks like."

Inflation, interest rates and concerns about a recession have yet to affect used-vehicle sales as much as Bill Wallace, CEO of Wallace Automotive Group, of Stuart, Fla., expected.

The dealership group decreased used-vehicle inventory this spring, expecting negative impacts of an unfriendly macroeconomic environment. Across all stores, the group reduced inventory to $12.5 million from a standard $16 million, representing a used-vehicle count trimmed to about 850 from about 1,000. Wallace Automotive sold roughly 870 used vehicles in March, flat compared with the same month in 2022; and about 860 in April, up 7 percent.

"I don't think we overreacted, but I think if we were to do it again, we might not have any reaction at all because we didn't really see any slowdown," Wallace told Automotive News.

Wallace said he expected consumers to use their income tax refunds, typically a driver of spring used-vehicle sales, on other things this year. But as far as he can tell, they behaved as normal. They are ultimately having more conversations about vehicle payments as interest rates are higher, Wallace said, though they typically go into a purchase aware of the situation and are not surprised by higher down payments and monthly payments.

Wallace is concerned about the looming threat of a recession, but with a surprisingly normal quarter in the rearview, said he is "cautiously optimistic" about the rest of 2023.

Abigail Ham contributed to this report.