Economists say decline in used vehicle prices may not spur demand

Used vehicle prices in the United States are expected to moderate as rising interest rates and new vehicle supply impact used vehicle demand, according to vehicle market economists. However, used vehicle prices might not fall enough to increase demand amid tight vehicle inventory.

According to the Manheim Used Vehicle Value Index, wholesale used-vehicle prices rose by 0.8% in December from November but were down 14.9% from December 2021. The rise was attributed to a seasonal adjustment, while the year-over-year decline was an index record.

In a recent conference call, Chris Frey, senior manager of economic and industry insights for Cox Automotive, said he expects vehicle values to moderate through the first quarter of the year and possibly into the second.

According to Dealertrack data, used retail sales fell by 7% in December from November. The sales declined by 10% in December from the same month in 2021.

Jonathan Smoke, the chief economist for Cox Automotive, said a rise in new vehicle inventory has contributed to a decline in used vehicle demand. Rising interest rates also have affected the demand.

Used retail vehicle inventory fell by two days to 52 days in December, from November, according to vAuto data. The December inventory was up by one day from the same month in 2021. Wholesale vehicle inventory increased by two days to 31 days in December, from November. The December supply is up five days from the same month in 2021.

While declining prices help to make vehicles more affordable, Frey said used vehicle prices might not fall enough to lead to a rise in demand, with vehicle supply remaining low and in line with 2019 levels.

“One of the key themes for people to keep in mind is once that tourniquet starts getting twisted of interest rate increases, that stops a lot of people or delays their purchase decisions – new or used,” Frey said. “On the used side, it’s probably a little bit more, and the price has been so elevated that now some of those even lower-end units are becoming more out of reach for people because the interest rates are making those payments much higher.”

Jeremy Robb, senior director of economic and industry insights for Cox Automotive, noted that vehicle repossessions at Manheim have started to rise but have yet to reach pre-pandemic levels. Smoke said he doesn’t expect repossessions to return to pre-pandemic levels for years as consumers prioritize auto loan payments because of the challenge to find an affordable alternative and that subprime buyers comprise a smaller segment of the loan pool.

Also, Robb said vehicles coming off lease and into the wholesale market have risen but remain down from 2019 levels. Robb said the market likely won’t return to those levels for years as fewer new vehicles have been leased.

“This drop in supply will be felt over the next few years and may help to mitigate some of the pressure we could see from other factors that would decrease the value of near-new wholesale vehicles,” Robb added.

New vehicle sales increased by 4.9% in December from the same month in 2021. The December sales were up 12.2% from November. The seasonally-adjusted annual sales rate in December rose by 4.7% to 13.3 million from 12.7 million in 2021. However, the December sales pace was down from 14.2 million in November.

Since July 2021, new vehicles have been selling at prices above the manufacturer’s suggested retail price, Robb said, noting that the trend has been moderating but remains 6 to 7 percentage points above normal.

According to Manheim, those with plans to purchase a vehicle in the next six months increased slightly in December and was up from the same month in 2021. Consumer sentiment improved in December as the price of gasoline fell to its lowest level in more than a year. The price narrowly rose at the end of the month.

According to AAA, the U.S. average price for regular gasoline was $3.21 per gallon on Dec. 31, down 2% from the same day in 2021. In Arkansas, the average price fell by 1 cent to $2.95 a gallon this week from last week. Texas motorists are paying the least at $2.85 a gallon, while California motorists are paying the most at $4.42 per gallon. AAA spokesman Nick Chabarria attributed the recent decline to weaker fuel demand and slightly lower crude oil prices.

For 2023, the Manheim Used Vehicle Value Index is projected to fall by 4.3%. Used vehicle sales are expected to be 35.6 million, while used retail sales of 18.9 million. New vehicle sales are projected to be 14.1 million, with new retail sales of 11.9 million.

BROADER ECONOMIC TRENDS
“The U.S. consumer kept the economy going in 2022 despite challenges from inflation and the medicine to cure inflation being applied by the Fed,” Smoke said. “In the spending data we can track on a fairly timely basis, we see no evidence of the consumer pulling back.”

He said as of mid-December, consumers’ debit and credit card spending were up 22% in 2022 from 2021. Spending has shifted to services and travel and from goods, especially housing. Still, vehicle spending was up 19% year-over-year, said Smoke, noting that the category includes spending on parts, service and purchase of vehicles.

“It is, of course, influenced by higher prices,” he added. “But what is most important to the economy is that the consumer has not stopped spending. And, the consumer had more to spend at year-end.”

He cited the decline in gas prices in the last two months of 2022. The prices at the end of 2022 were the lowest of the year and down from 2021. He said consumer sentiment increased by 2.6% in November and 4.3% in December.

“A key reason why spending remains strong is that consumers are in strong financial shape, with an unemployment rate of 3.5% continued, albeit slowing job creation, historically strong wage growth and most households with deposits and financial resources that are larger than they were before the pandemic,” Smoke said. “The number of people on traditional unemployment benefits at the end of the year was 69,000 lower than before the pandemic. Inflation is eating into savings, but a buffer remains.”

He said the United States has over 1.2 million more jobs than before the pandemic.  Still, good news, such as a strong unemployment report, has led the Fed to increase interest rates, which affects the vehicle market. He expects the Fed to continue to increase rates by between 0.75 and 1 percentage points through the spring. Inflation slowed to 6.5% in December.