Used Car Market Gets the Green Light for Recovery

About a month ago, I tried to offer some perspective on how the COVID-19 pandemic impacted the used car market while also examining how previous economic downturns may help provide a road map for what lies ahead. So what’s changed during the last four weeks or so? Luckily, for all of us, the answer is a lot.

The Road We’ve Traveled

When we look in the rear view mirror, we see the market highs of February in the distance. The pandemic initially disrupted the used car market in early March, tempering demand and slightly depressing market values. By the end of April, the impact of the pandemic was significantly more pronounced. Prices had declined by approximately 15-18% from February’s highs as many auctions and dealerships were forced to temporarily close and transition to online sales.

Fortunately, as the calendar turned to May, the automotive industry started to stabilize. Many auctions and dealerships worked to establish protocols for reopening and manufacturers took steps towards restarting production as shelter-in-place restrictions were eased in many regions. Today, the majority of dealerships and auctions have resumed in-person sales and new vehicles are beginning to roll off the assembly line (although production capacity remains lower than normal).

So what does this all mean for the used car market and its recovery?

We’re Picking Up Speed

The positive momentum continues to build as overall economic conditions trend in the right direction. As dealerships and other businesses across the country continue to reopen, we’re certainly seeing a significant shift in buyer sentiment.

During the last several weeks, many consumers has received stimulus checks and tax refunds, providing a much needed catalyst for the retail segment of the industry. Consumers are beginning to buy vehicles again, driving the market and, in turn, increasing demand for wholesale units. The uncertainly of the spring has given way to a summer of optimism; and market data echoes this sentiment.

Here’s a closer look at the road that led up to now:

While there is still some level of uncertainty ahead, the good news is that we’ve likely seen the worst of the market volatility. In all likelihood, it is safe to expect these positive trends to continue – and perhaps even improve further – as we move into the summer months. However, it’s important to keep in mind that despite these positive signs, there’s still work to be done.

Proceed with Caution

Cautious optimism is a phrased that has been often used to describe various aspects of the COVID-19 pandemic and that same feeling also applies to the current state of the used car market.

Although buyer sentiment and key metrics show the used car market is headed in the right direction, the pandemic resulted in an extremely deep valley. We also need to be mindful that it is unlikely to be a seamless recovery and there will certainly be bumps in the road. One of the biggest X factors we’re currently monitoring is how rental car companies will respond to the dramatic declines in utilization.

The scale of rental car fleets in North America is measured in millions. With the demand for these units down an estimated 60-80%, there are thousands of vehicles sitting idle and not generating revenue. Further complicating the matter is the uncertainty surrounding how these businesses will emerge from the COVID-19 pandemic; will there be mass a mass sell-off of assets? What will happen to vehicle values in these asset classes? Will the risk of bankruptcies grow?

All of these are great questions but without a crystal ball, we need to consider several “what if” scenarios:

  • If there are additional bankruptcies or this sector of the industry fails to return to pre-pandemic levels, we should expect to negative pricing pressure as these fleets look to right size and address utilization trends.
  • Conversely, OEM production has slowed significantly during the pandemic and as a result, many 2020 model year vehicles have been cancelled. This lost production may help to offset any potential oversupply as if/when these companies begin to right size their fleets.

It is also important to keep in mind that rental car fleets are typically comprised of late-model vehicles that are popular with consumers – sedans, crossovers, SUVs, etc. – so the impact to vocational fleets that often feature a large number of complex trucks and vans would likely be minimal.

Record unemployment, an extremely high volume of used vehicles in the market, unpredictable long-term demand, and the potential of a COVID-19 resurgence all loom as additional potential threats to the market’s recovery. But without hesitation, I believe it is safe to say that the used car market is no longer reacting to the uncertainty of the pandemic but rather well on its road to recovery.

Again I’d like to offer the same advice from my previous blog; don’t overreact (positively or negatively) but remain agile. As this recovery continues, adjust accordingly to potential detours along the way but always do so with an eye towards your long-term destination.

Be sure to stay tuned to ARI’s blog for the latest updates and strategies for recovery as the fleet industry continues to emerge from the effects of the COVID-19 pandemic. Also, please visit ARI’s COVID-19 Resource Center and subscribe for weekly or daily updates via email.