The pandemic has been a boon to few, but auto dealers have benefited from fewer new vehicles by driving up prices. It’s the old “supply and demand”. People did less and saved money for big purchases. And without the ability to buy new cars, used car prices soared. But now it’s 2023 and everything is spinning backwards.
Why are used cars no longer being sold?
A used Toyota dealer | Jack Smith/Bloomberg via Getty
Leasing is way down, meaning there are no low-mileage cars for a wholesale dealer to pick. Interest rates are high and new cars are making their first post-pandemic production. But they’re a lot more expensive because of inflation and because automakers can get away with it.
Now we have car buyers who have less money to spend. And with fewer cars coming off leases and new cars seen as too expensive. The result is that car dealers are now looking for clean, older, high-mileage cars to make sales. Obviously they’re worth less, so they cost less. A dealer told Automotive News, “I wouldn’t normally do this, but we recently sold a 2015 Ford F-250 with 80,000 miles.”
For 2022, used car sales have fallen to their lowest level in almost a decade. Overall, they were down 11 percent from 2021. Economists fear selling will worsen this year with high inflation, high interest rates and buyers waiting for both to fall.
How are dealers reacting to slower used car sales?
Shoppers roam Ford and Cadillac dealerships | David Paul Morris/Bloomberg via Getty Images
According to Automotive News, dealers can only lower prices, accept less gross profit on sale, and pay less for trade-ins. But most say they will increase used sales this year. That might be difficult, as franchise dealers report that it now takes an average of 42 days to sell a used car.
Another problem affecting dealers is the trend for lessees to buy their unleased cars instead of a new and much higher lease. Even a $200 or $300 monthly increase for a new lease can be too much to bite off when many more Americans are now living paycheck to paycheck.
The opposite of this is that fewer low-mileage lease cars are showing up at wholesale auctions. Dealers are hoping this will be temporary as new car production gradually returns to normal. When they start dispensing in two or three years, there will again be higher volume of these desirable cars for sale.
Does it get better or worse?
General Motors dealer | Brandon Bell/Getty Images
But until then, the retail market remains weak as dealers are unwilling to pay more for cars and demand is falling. This in turn triggers an overall depreciation of the used car, which dealers have to take into account for their lots every time they make a purchase.
The hope is that the inevitable recession, which some believe began in October 2022, will not be severe and that new car inventories will be healthy by the end of the year. Combined with potentially lower interest rates to stimulate demand, 2023 may end much better than some are predicting.