In February, the used-vehicle market looked as strong as ever headed into the busy spring selling season. “We were having a good year, and we were tracking up even through the first two weeks of March,” said Jonathan Banks, vice president of vehicle valuations and analytics at J.D. Power.
Then the coronavirus pandemic took hold.
For the week of March 16, wholesale vehicle prices dropped 5 percent week over week, according to J.D. Power data. It was an extraordinary drop in one week’s time, Banks said. The firm had expected prices to be up 2 percent for the month but now expects a 2 percent decline.
Things will go downhill from there. “We expect the worst price impact to hit in May, and we’re expecting prices for used vehicles to go down somewhere around 15 percent,” Banks said, adding that’s “compared to today’s levels.”
This is happening despite dropping auction volumes, which in normal economic times would almost certainly cause prices to rise. Instead, through the first three weeks of March, wholesale auction volume was already down 26 percent compared with the same period last year, according to figures provided to J.D. Power from AuctionNet. Banks said a decline in both auction volumes and prices is a “phenomenon [that] goes against microeconomic theory.”
The Manheim Used Vehicle Value Index hit an all-time high in February, said Jonathan Smoke, Cox Automotive’s chief economist. Used-vehicle sales remained strong through the first week of March, and then demand began to fall off. Used-vehicle retail sales swung from being up 26 percent year over year on March 10 to being down 16 percent on March 19.
The abrupt declines track with when the country largely began to react to the seriousness of the spreading novel coronavirus. Large events started getting canceled early in March, schools began to send students home, and then local, state and federal leaders began issuing stay-at-home policies. President Donald Trump in a March 16 press conference advised the public to avoid groups of more than 10 people. California became one of the first states to issue a statewide stay-at-home order on March 19, and dozens of other municipalities, counties and states have since followed suit.
Not only did that mean fewer people heading out to do some car shopping, but many local governments began ordering dealerships closed except for essential operations such as service.
Retail and wholesale activity plummeted. “We’re seeing reports of sale days with conversion rates into the teens, the 20s — [on] a good day it’s at 30 percent,” Laura Wehunt, vice president of automotive valuations at Black Book, said last week. “It’s not a pretty picture.”
KAR Global’s ADESA has completely halted auctions for at least two weeks, as of March 20, taking a huge chunk of wholesale volume off the market. Manheim, where permitted, had still been doing digital-only auctions at press time.
Until the coronavirus began to bring the market to a halt, Michael Galietta, general manager at Bridgewater Acura and VIP Honda stores in New Jersey, expected used-vehicle sales to be the largest profit driver of the year. “Used is my biggest moneymaker,” he said.
But now, his time has been occupied worrying about how to handle employees who have been sent home but not yet laid off, as he navigated the federal stimulus package that was working its way through Congress last week, hoping for an answer.
Galietta had to stop selling vehicles but kept his service lanes open, per local orders. Still, his business development center has been seeing some leads come through — overwhelmingly for used vehicles — so when the dealerships can sell cars and trucks again, they’ll have some customers in place.
Galietta expects used-vehicle sales to bounce back, eventually. “It’s going to be the same thing as the financial crisis 12 years ago,” he said. “Used cars will be fine, stronger than ever, and so will service.” The same can’t be said for new-vehicle sales, because customers will likely be gravitating to cars and trucks that are less expensive when they’re ready for big-ticket purchase again, he reasoned.
New or used, it will take time not just for the virus to presumably run its course and governments to lift stay-at-home orders, but for consumers to be confident enough to make large purchases again.
“Consumer demand right out of the gate is going to be much lower,” said Alex Yurchenko, Black Book’s senior vice president of data science. It was clearly falling at the end of March.
Banks, of J.D. Power, said that if the COVID-19 outbreak in the U.S. follows the same trajectory as it has in China and South Korea, case numbers would peak sometime in mid-April. Under that timing, J.D. Power would expect the used-vehicle market to recover relatively quickly. Used-vehicle prices could reach some kind of steady state by the beginning of next year, he said.
A more bleak outlook, which assumes the virus keeps spreading unchecked, could mean used-vehicle prices stay down about 5 percent through 2021.
So what should dealers be doing in the meantime? Banks said they should look at their holding costs. And, it will depend on region, but when prices are at rock bottom, it could be a good time to make some vehicle acquisitions.
“There could be a play here to get some inventory,” he said. “But you also have to have a little bit of nerves of steel, because you would have to assume that we’re going to get through this quickly. Otherwise, now you have a bunch of inventory that you can’t sell.”