US Used Car Market: Permanently Disrupted?

The onset of the COVID-19 pandemic in early 2020 caused unprecedented disruption to the auto industry. Automakers shut down factories for weeks to stop the spread of the virus, leading to a severe shortage of new vehicles in the market. The supply chain problems continued to escalate, with an ongoing semiconductor chip shortage causing factories to cease production again for weeks or months at a time in recent years. The lack of production resulted in fewer new vehicles becoming used models, leading to inventory constraints in both the new and used vehicle markets, as well as record prices due to resilient demand.

The U.S. used vehicle market has been a barometer for the country’s inflation levels. A notable decline in used vehicle prices toward the end of last year has been roughly cut in half in 2023, as inventories remain significantly down following vehicle-production disruptions. There’s also been an uncharacteristically large number of consumers buying out leases to avoid sky-high car prices and increasing interest rates.

According to Cox Automotive, wholesale used vehicle prices are up by 8.8% this year through mid-March, according to the Manheim Used Vehicle Value Index, which tracks vehicles sold to dealers at auction. The prices are trending higher, and the index is heading back toward a record of 257.7 basis points set at the start of 2022. It was 238.6 as of mid-March.

Used car prices are rising again
After spending most of 2022 on a downward trajectory 

Note: January 1997 = 100
Chart: Gabriel Cortes / CNBC
Source: Manheim Used Vehicle Value Index

The used vehicle inventory is down 21% from a year ago and off a whopping 26% from pre-pandemic levels of 2.8 million available vehicles in 2019. Cox Automotive doesn’t expect the total number of used sales to return to pre-pandemic levels of about 38.2 million units until at least 2026.

Adding to the production hole is a change in leasing. Cox reports a 20% increase in consumers who leased their vehicles by buying them out instead of trading them in from 2019 to 2022. The increase occurred as residual values of the vehicles in some cases was far above expectations, making it significantly cheaper to buy the vehicle than lease another amid inflated prices and rising interest rates.

The pandemic’s impact on the used car market has been profound. In the past, the used car market was seen as a place to find bargains. However, this perception has changed due to the pandemic. The used car market has become very competitive, with fewer vehicles available for purchase. This has led to increased demand, which, in turn, has driven up prices.

The COVID-19 pandemic has upended the used car market, including the salvage car market. With new vehicle production halted for weeks on end, the number of new vehicles that could become salvage cars has been significantly reduced. As a result, the supply of salvage cars has decreased, and prices have risen.

The shortage of new vehicles has created a higher demand for salvage cars, which has driven up prices. Salvage cars are typically sold at auction, and the increasing demand has resulted in more competitive bidding and higher prices. This has made it more difficult for salvage yards and rebuilders to acquire the cars they need to maintain their businesses.

In conclusion, the COVID-19 pandemic has had a significant impact on the used car market, including the salvage car market. The shortage of new vehicles has reduced the number of potential salvage cars and created a higher demand for salvage vehicles, resulting in rising prices. Cox Automotive predicts that it will take until at least 2026 for the total number of used car sales to return to pre-pandemic levels, which could continue to impact the salvage car market.

Source: "Why the U.S. Used Vehicle Market May Never Return to Normal."
by Michael Wayland, originally published on CNBC.com on March 25, 2023.