Used vehicle sales to rise up to 30% during tax refund season

by Jeff Della Rosa ([email protected]) 1,695 views 

Used vehicle sales are expected to increase between 20% and 30% in the last week of February as tax refund season begins, and sales are expected to remain elevated through mid-April, an economist said.

In a fourth-quarter conference call on the Manheim Used Vehicle Value Index, Jonathan Smoke, chief economist of Cox Automotive, provided guidance on car sales during the tax refund season. Meanwhile, Zohaib Rahim, manager of economic and industry insights for Cox Automotive, discussed used vehicle prices for December and other market trends.

Used vehicle prices rose 1.5% in December, from November, Rahim said. This led the Manheim Used Vehicle Value Index to rise 2.5% in December, from the same month in 2018.

Smoke said tax refund season is expected to have fewer surprises in 2020. Over the past two years, the IRS distributed almost 50% of refunds by the ninth week of the year, which would be the last week of February. Peak demand usually ended by the 16th week of the year, or mid-April, which is when about 90% of tax refunds have been distributed. Sales have increased the most for more affordable vehicles, such as compact and mid-size vehicles.

Smoke expects the values to be more normal in 2020 compared to previous years, with the used vehicle value index rising 1.5%. Some risks to the estimate include an economic downturn or new tariffs on automobiles or parts. Rahim said new vehicle prices reach a peak in December, and used vehicle prices typically come to a peak in March and April as sales rise during tax refund season. In recent years, used vehicle prices also have risen in the summer.

Used vehicle prices typically rise on average of about 2% annually as a result of an increase in new vehicle prices, Rahim said. Cars comprise the largest share of vehicles sold in the used car market. Demand remains strong but supply has been falling. Meanwhile, SUVs comprise the largest share of vehicles sold in the new car market. Smoke expects the supply of used cars to continue to fall as SUV sales continue to dominate the new car market.

Retail sales of used vehicles, which represent used car dealer sales, are expected to rise to 20.3 million vehicles in 2020, from 20 million in 2019. In the second quarter of fiscal 2020, which ended Oct. 31, Bentonville-based America’s Car-Mart reported vehicle sales rose 8.7% to 13,763 vehicles, from the same period in the previous year. Earnings for the buy here, pay here used car dealer rose 23.1% to $13.88 million. Revenue increased by 13.8% to $190.31 million.

Smoke said the growth in used vehicle sales in 2020 is most likely to come from 5- to 8-year-old vehicles, compared to recent years in which the growth could be attributed to vehicles that are up to 4 years old. Total used vehicle sales are expected to decline to 39.4 million vehicles in 2020, from 39.6 million in 2019, according to Cox Automotive.

Three-year-old vehicles comprise the largest share of vehicles sold at auction at Manheim, Smoke said. Values have been stable for 1-year-old vehicles, which comprise rental or program vehicles. In December, the average price for rental vehicles sold at auction rose 3.5%, from the same month in 2018. The price increased by 1.5% in December, from November. Average mileage for the vehicles rose 6% to 51,395 in December, from the same month in 2018. The December mileage was up 5% from November. The condition of rental vehicles sold continues to improve, Rahim said.

Vehicles that are coming off lease hit a peak in 2019 at 4.1 million vehicles, and the same number of vehicles is expected to come off lease in 2020.

“We are at high tide,” Smoke said. “The high tide in off-lease units will continue to fuel strong sales of higher-priced gently used vehicles. However, as higher incentives and heavier discounting of brand new units is likely, pressure will keep used prices in check.”

Cox Automotive’s Dealer Sentiment Index for the fourth quarter shows that the market is mostly unchanged from the third quarter and remains negative with an index score of 47. The one-point decrease from the third-quarter score of 48 was not statistically significant.

The fourth-quarter score increased three points, from the same period in 2018. The index has been more positive for franchise dealers than it has been for independents, but the gap has become narrower. The index score for franchise dealers fell five points to 51 in the fourth quarter, from the third quarter. The score for independent dealers was flat at 46. The decline in the score for franchise dealers can be attributed to a decrease in used vehicle sales from the previous quarter. The new vehicle market is stable for franchise dealers, down one point from the third quarter and remains positive at 56.

Views for the future were similar among franchise and independent dealers, with index values of 54 and 51, respectively. The rise in the score for independent dealers likely is a result of improved used vehicle inventory and rising profits. Factors negatively impacting business for all dealers were consistent in the fourth quarter, with market conditions at the top. Competition was second, followed by credit availability for consumers and limited inventory. The economy was No. 5.