Companies that fail to profit from the used car industry are clearly missing the mark.
Due to supply chain disruptions caused by the Covid pandemic, the production of new vehicles declined, leading to a surge in sales and prices of used cars. While these issues have improved, the production of new cars still falls short of the demand.
Industry analysts predict that between 2020 and 2025, there will be a shortfall of 10-12 million cars compared to pre-pandemic levels. This decline in new cars will inevitably affect the supply of used cars as well.
Moreover, the supply of leased vehicles, another significant source of used cars, is also limited. In a typical year, around 4 million leased vehicles are returned, but Cars.com estimates that from 2023 to 2026, there will be an additional shortage of up to 5.8 million cars.
“That’s a significant gap in the used vehicle market,” says David Greene, Cars.com’s industry and marketplace analyst. He suggests that those who felt they overpaid for used cars during the pandemic may have actually gotten good deals.
Greene adds, “Prices will remain elevated for several years. The entire industry is benefiting from this situation.”
As a result, the used car industry has experienced significant gains this year, with Carvana (NYSE:CVNA) leading the pack with nearly 1,000% growth, followed by ACV Auctions (NASDAQ:ACVA) at a 106% increase, America’s Car-Mart, Inc. (NASDAQ:CRMT) with a 55% increase, Lithia Motors (NYSE:LAD) with a 54% increase, and CarMax (NYSE:KMX) with a 50% increase.
The Demand-Supply Imbalance Persists
Cox Automotive, an automotive services organization, projects that 35.5 million used vehicles will be sold in 2023, compared to an average of around 38 million before the pandemic. Although the number is expected to rise to 36.2 million in 2024, it will still fall short due to the limited supply of cars on the market.
Chris Frey, Cox Automotive’s business intelligence senior manager, states, “This situation leads to higher prices, lower supply, and consumers having to delve deeper into the used car market. They may have to settle for older and higher mileage vehicles to find one that fits their monthly budget, which is the major factor determining affordability.”
Usually, as the fourth quarter approaches, there is a depreciation in pricing which benefits consumers. However, this year may be different. Recent reports indicate that wholesale pricing may not decrease, possibly because dealer lots still have limited supplies of used vehicles.
While supply issues have been the main driving force behind these price fluctuations, demand is also influenced by pricing and interest rates. If the cost of financing a car is high, consumers tend to hold onto their current vehicles until buying becomes more affordable. Additionally, higher interest rates can impede subprime customers’ ability to purchase vehicles, leading to reduced demand for certain types of vehicles.
Fortunately, recent data from the Commerce Department reveals that U.S. consumer spending in July experienced its highest increase in six months. This indicates a healthier macro environment than anticipated.
Cars.com’s Greene adds, “There is currently massive pent-up demand. Until that demand is met, we can expect strong sales and continued high demand.”