Will used vehicle prices plunge due to COVID-19?

Posted by George Augustaitis on April 17, 2020

For the past five years, the number of new vehicles coming off lease has continued to increase. So much so that many in the automotive industry expected a decline in prices because of the rising supply. However, because the mix of vehicles coming off lease favored the more expensive SUVs and pickups, used vehicle prices have remained high. Even with a record number of off-lease vehicles coming back to the market this year and the used vehicle market flat YoY, used vehicle prices still would have only seen a slight decline. However, COVID-19 looks to have changed all of that.

COVID-19 left the industry with no time to prepare

During the Great Recession of 2008, it seemed as if the industry didn’t have time to prepare for the pullback in the used vehicle market. However, in hindsight, months of decline in the used and new vehicle markets allowed for a contraction in vehicle prices. In contrast, COVID-19 stopped the automotive industry in its tracks, leading to an unprecedented quagmire with used vehicle demand and supply.

Demand for used vehicles is down

COVID-19 has impacted the demand for the used vehicle market:

  1. As jobless claims near 22 million since the start of the crisis, many people who were in the market for a vehicle have put their purchase plans on hold.
  2. The millions still with jobs, are also no longer thinking about buying a vehicle. They’ve lost confidence in the economy and are uncertain about their employment status.

While there are still consumers buying cars out of necessity, such as replacing a broken-down vehicle or a lease ending, overall demand in the market has declined.

Used vehicle supply is piling up

This decrease in demand is causing the supply of used vehicles, both at the auction lanes and on dealer lots, to rapidly pile up and vehicles are left sitting. While dealers that are deemed ‘essential’ can still sell vehicles, those whose doors have remained temporarily closed are not moving any used inventory.

As the daily sales rate in the used vehicle market falls, so does the rate at which dealers need to restock inventory. This is evident in the fact that the weekly auction sales rate recently fell below 15,000 units for the first time, according to Auto Remarketing. Auction and used vehicle sales rates will likely reach an all-time low soon when about four million vehicles come off lease later this year. Further adding to the auction volume in the short term are the rental car and commercial fleet companies sending vehicles to the auction lanes with the hope of increasing cash flow by offloading vehicles.

However, there are other factors that will continue to add to the supply of vehicle levels. For example, vehicle repossessions have increased during previous recessions and there will likely be a repossession wave coming with jobless claims so high.  It’s possible that we’ll see another wave as well. Even though some lenders are allowing consumers to defer payments, when those consumers face paying deferred bills down the road, it could result in more repossessions.  This double wave will only add to the used vehicle supply tsunami that is going to hit the market.

COVID-19 has created a quagmire for used vehicle prices

The supply and demand curves changing at the same time is leading to a rapid decline in used vehicle prices. Fewer buyers in the market coupled with rising inventory levels will result in a decline of used vehicle values for the foreseeable future.

This is not the first time used vehicle valuations have declined. In 2008 and 2009, the supply for used vehicles outpaced the demand, which caused a drastic decline in prices. As the economy recovered, people went back to work, consumer confidence returned and these both helped increase the demand for used vehicles. As the influx of demand quickly outpaced the supply, used vehicle values rapidly increased. While the COVID-19 recession is not the same as the 2008 recession, the patterns are similar and we will eventually see the demand return—and a rebound in used vehicle valuations will come with it.

If you have specific questions about economic trends and their impact on your business, please reach out to me at pr@cargurus.com, so I can address them in future posts.

Topics: covid-19, industry analysis