Used Vehicle Prices are Steady and Strong: Here’s Why…

used vehicle

Used-vehicle sales typically spike in spring and taper off throughout the rest of the year. With the start of school and the end of summer, new-vehicle summer sales drives are winding down and August sales volumes typically start to wane. This is not the case in 2018, however.

In a recent Automotive News article, Cox Automotive manager of economics and industry insights, Zohaib Rahim, was quoted as saying: “It’s been a crazy year for used-vehicle pricing.” The company’s Manheim Used Vehicle Value Index rose 1.5 percent in July and 5.1 percent over the previous year. Prices appear to be as strong as ever in August, as well.

“That’s not alarming, but it’s very abnormal. We don’t see this price trend this part of the year,” Rahim said. “Used-vehicle prices typically peak in … March and April, and they decline the rest of the year.”

KAR Auction Services, Inc. CEO Jim Hallett told Automotive News: “Going into the year, our economist and folks we work closely with were saying we should expect a 3 to 5 percent shift [down] in pricing based on just the influx of the off-lease cars with those volumes increasing year over year,” Instead, prices have “held up very, very strong.”

So, what are the reasons for this unusual pricing behavior?

Threat of Tariffs

The looming threat of trade wars has everybody on edge. While the economy is strong right now, it seems that consumers are “hedging their bets,” as it were. As new-vehicle prices threaten to increase in the face of trade tariffs, buyers are showing a strong preference for used-vehicles, thus increasing demand and depleting supplies.

Dealers are stocking up

Consumers aren’t the only ones hedging their bets. Dealers are also betting strong that new vehicle prices are going to rise due to tariffs. Many dealers are starting to stock up on inventory which increases cost of acquisition for all dealers. This can be a risky proposition, however, as rising flooring interest can get expensive for overaged inventory.  

Flat Incentives

KAR executives have attributed the current high prices for used-vehicles (in part) to flat new-vehicle incentives. There is typically a strong correlation between factory incentives on new-vehicles, and prices for used-vehicles. Manufacturers have recently been bucking the long trend of issuing big incentives on new-vehicles, which has generally resulted in lower used vehicle prices.

Greater Emphasis on Used Vehicle Sales by Dealers

In relation to the previous two points, dealers are redoubling their efforts to sell used vehicles. For a long time now, used-vehicles have been an afterthought for many dealers. In recent years, however, more dealers are developing specific plans to expand their used-vehicle retailing. This concerted effort is having a positive effect on the amount of used vehicles sold in the marketplace, and consequently, prices are higher.

Great Recession

The great recession is still having its effect several years later. With so few new vehicles sold back in 2008-2011, used-vehicles that are 6-10 years old are in short supply, causing prices to skyrocket for this vehicle segment.