The Surprising Strength of Q1 2023 Used Vehicle Sales

The used vehicle market has demonstrated remarkable strength in early 2023, surpassing expectations that affordability concerns would dampen consumer interest. According to Cox Automotive, sales of used vehicles increased by 5% in January 2023 compared to the same period in 2022. Wholesale used-vehicle prices increased 4.3% in February from January. This was the largest increase for the full month of February since 2009’s 4.4% rise. The reasons for this unexpected trend have puzzled many economists and data scientists.

One possible factor contributing to the robust performance of the used vehicle market is an early start to the spring tax season bounce. The Internal Revenue Service has processed a significantly higher number of refunds this year than during the corresponding period last year. Despite the average refund being smaller than in 2022, it is believed that consumers are using their tax refund-related funds to purchase used vehicles. This surge in demand has resulted in a 2.5% appreciation in the value of used vehicles since the start of the year, contrary to the anticipated depreciation.

For dealers, the current market conditions present a unique opportunity. Those with lean inventory have the chance to acquire vehicles now and take advantage of what will likely be a short-lived run of retail price appreciation. However, dealers with inventory that exceeds their rolling 30-day total of retail sales should focus on right-sizing their inventory rather than adding more units.

Dealers need to be aware that the strong used vehicle sales won't last forever. By mid-April or early May, the market is likely to cool off due to three factors: Rates, Refunds, and Rebates. Interest rates are expected to go up at least once before mid-April, which can decrease retail demand because financing a used vehicle becomes more expensive. Refunds are expected to decrease after mid-April or early May as most refunds will have already been given out, which means the demand for used vehicles will decrease too. Rebates for new cars are already increasing, and factories are expected to spend more on rebates, which can reduce the value of one, two, and three-year-old vehicles. This can create more pressure on dealers who are trying to sell newer models of used cars.

Although the current state of the market is not alarming, it is a further indication that the used vehicle market experiences more frequent fluctuations than in the pre pandemic. For dealers looking to maximize their success in this dynamic market, it is important to remain informed and proactive. By keeping a close eye on interest rates, tax refunds, and factory rebates, dealers can stay ahead of the curve and position themselves to take advantage of market opportunities. Additionally, dealers should focus on maintaining lean and agile inventories that can respond quickly to changes in demand.