Used car market not likely to be as strong in 2022, economist says

The used vehicle market is expected to moderate this year, but prices won’t return to pre-pandemic levels amid tight supply and strong demand, an economist said.

In a recent webinar, Jonathan Smoke, chief economist for Cox Automotive, said used vehicle prices are expected to peak this spring during tax refund season. They are projected to rise about 3% to 5% from existing levels before moderating the rest of the year.

“The level of today’s auto prices is the new normal,” Smoke said. “We won’t see a return of pre-pandemic prices, barring an economic catastrophe because that’s basically the ingredients it would take to give us a dramatic oversupply situation. But we do see an end to the persistent used price increases that we have experienced both in 2020 and in 2021.”

According to the Manheim Used Vehicle Value Index, wholesale used vehicle prices are up 46% as of mid-January, from the same month in 2021. The supply of used vehicles in the retail market has reached normal levels, which is 50 days, according to vAuto data. Wholesale vehicle supply has improved to 25 days, or three days higher than normal levels.

This year, Smoke doesn’t expect a large price correction, with wholesale used vehicle prices projected to fall by 3% in December, from the same month in 2021.

“We are expecting record tax refunds this year,” said Smoke, noting that only half of the child tax credits were distributed in monthly payments last year. He added the credits were doubled and that more people became eligible to receive the full credits. “The result is the average person that gets those credits is going to get more money on their tax refund for 2021 despite the fact that they received payments in the second half of the year,” he said.

Also, he noted a disconnect between consumer sentiment and buying higher value items as vehicle sales reached a record in 2021 amid supply challenges, but sentiment remains below pre-pandemic levels. The same is true for housing, he added.

“Consumers may say they don’t feel so good or say they’re worried about the future, but they’re behaving differently,” Smoke said. “I’m a big believer in following what consumer sentiment is telling you…But we’ve definitely been in a world where consumers say one thing, and they do something else.”

Smoke explained multiple factors contributed to the record used vehicle sales in 2021 as vaccinations rose and people started to leave their homes, stimulus money and tax refunds fattened consumers’ wallets, new vehicle supply tightened and the preference for personal transportation increased.

“You had absolutely the biggest demand you could ever architect on paper happen in 2021,” Smoke said. “Demand is just not going to be as strong in 2022. We do see a traditional pattern like with tax refunds, but there’s not likely to be another round of stimulus, interest rates are probably going to be working against consumers, especially as the year progresses. A lot of factors that added tailwinds to demand start to become headwinds in 2022. We still think it’s going to be strong, but our sales forecast says it’s roughly going to be the same.”

He added that is mainly because tight supply limited vehicle sales in 2021 and is lingering in 2022 as pent-up demand.

Used vehicle sales are expected to fall to 39.3 million in 2022, from 40.9 million in 2021. Vehicle sales rose about 10% in 2021, from 2020. Used vehicles sold at retail are projected to fall to 22.1 million, from 22.2 million in 2021. Used vehicle retail sales were up 13% in 2021, from 2020.

Meanwhile, new retail sales are projected to rise by 5% to 13.6 million vehicles in 2022, from 2021.