What changes can dealers expect to see in the used car market this year?

A crystal ball look into the 2023 used car market will be cloudy as this part of the industry responds to more stable new car supplies and higher consumer borrowing costs. Plus, steadily declining wholesale and retail prices don’t sharpen the picture.

But before we dive in with projections for the future, let’s recap some of the highlights (or lowlights, depending on your point of view) of the used car business from last year.

2022: setting the stage for 2023

Used car wholesale prices

The Manheim Used Vehicle Value Index for 2022 shows a 14.9% decline in wholesale auction prices over the twelve months. The record high from January 2022 was a spillover from the inventory-starved times of later 2021. And except for an upward blip last May, dealers have, on average, been paying less for their used cars with the passing of each month. 

Used car retail prices

According to the CarGurus Index, the average price a consumer paid for a pre-owned vehicle hovered at record highs for most of 2022, reaching a peak of $31,180 in July. But as most dealers are aware, it hasn’t been the same since. The typical used car market transaction amount began to tumble in late September when the average of $30,969 could only be wished for now. By the end of 2022, a consumer was paying $28,974 for a used car. That’s a 6.2% drop from the start of the year and a 7.1% decline from the record average.

Federal Funds Rate

The benchmark Federal Funds Rate has significantly increased over 2022 as the Federal Reserve turned off the spigot of cheap money meant to goose a pandemic-stricken economy. Here’s an overview of the rate increases.

New car production 

Increased availability of new cars last year eased the demand for used vehicles as U.S. factories picked up steam. January 2022’s modest output of 1.56 million units was significantly outpaced by the 1.92 million new vehicles built in July, according to tradingeconomics.com. However, production tapered off by the end of the year, with 1.58 million units leaving assembly lines in December.

2022: a dismal year for used cars

It all adds to the worst year for the used car market since 2013. Last month, Cox Automotive estimated that it expects used car volume to have dropped by almost 11% last year to 36.2 million vehicles (the final number will come later this month). In 2013, the previous worst year, the industry moved 35.8 million used cars. Manheim also expects consumers to have bought 10% fewer used cars in 2022, bringing the total on the retail side to 19.1 million units. The worst year since 2016, says Cox. 

What to look forward to in 2023

2002 lays the groundwork for a bleak 2023. According to Cox, used vehicle sales will plunge further to an estimated total of 35.6 million units in 2023. This projection includes retail used vehicle sales dipping to 18.9 million units. And to pour more salt in the wounds, the Federal Reserve raised rates by another 0.25% last month, with further (albeit less severe) increases coming. 

Here’s what this points to for sellers of used cars in 2023.

A further decline in used car retail prices

In a September 2022 report, JP Morgan estimated that second-hand vehicles could drop by 10% to 20% more in 2023. 

Used EVs will sell for less

Tesla’s lowering of new car prices caused values to drop among used EVs. According to CoPilot, pre-owned Teslas dropped 6% last month, while overall used EV prices fell 4% during the same period. Ford’s lowering some prices for the Mustang Mach-E could lead additional EV makers to do the same. 

Fewer CPO unites available

The decline in leases (from about one-third of all new car transactions before the pandemic to less than 20% today) translates into fewer three-year-old cars to certify and resell. And this shortfall will start to hit in 2023.

The requirement for lower-priced inventory

While used cars have gotten cheaper, they’re far more expensive than before the days of COVID-19. Add in higher interest rates, and consumers are in even greater need of cheap used cars.

A reassessment of profit margins

Falling used car market sales means a re-evaluation of margins could be necessary to maintain sales volume. Further, declining wholesale prices can result in a squeeze if inventory isn’t moved quickly.

Digital buying will increase

COVID-19 accelerated online car buying, and consumers aren’t looking back. OEMs continue to grow digital sales, so shoppers expect the same with pre-owned vehicles. 

Carvana uncertainty

While Carvana represents less than 0.5% of used car sales, its outsized marketing is a presence in the industry and among consumers. It’s also sitting on thousands of vehicles purchased at now-inflated values. A bankruptcy filing or a major fire sale could have unknown consequences if the company slashes retail prices or pushes large amounts of inventory to auction.