COMMENTARY: Recession headlines distract & detract from true understanding of market dynamics in used-vehicle sector

The noise that you are about to hear — loud and clear — in the used-vehicle market during the next few months will not be the loud pop of a market bubble being pierced; rather, it will be the slow and steady hiss of air being released from an admittedly overheated market.

While the cooling effects of resurging production and the easing of truly unprecedented demand are already beginning to leave their mark on the sector, J.D. Power is projecting that the path to a more traditional vehicle valuation mean will look much more like a slope than a cliff.

This view, of course, is not currently a fashionable one. Loud histrionic noises around the catastrophic implications of an inflation-driven global recession have prompted many in the industry to dust off their most aggressive and dramatic contingency plans.

It would be, however, a mistake to overreact to the news of the day without first evaluating the used-vehicle fundamentals that tell a very clear story: The rug is not in danger of being pulled out from under the market.

Taking action without this realization could lead to a repeat of the well-documented mistakes many made in the immediate aftermath of the pandemic shutdown. In the rush to remove risk, lots were left empty—and customers frustrated—as panic prevented the market from finding its equilibrium.

Used-vehicle fundamentals

Let’s closely look at the fundamentals and start with a current analysis of pent-up demand. The ironic outcome of the pandemic was that supply chains were disrupted as disposable incomes rose. Unemployment almost immediately returned to sub-4 % levels during the course of 2020 and 2021, spurring demand to stratospheric, unsustainable and, frankly, unhealthy levels.

Demand today remains high, with many factors continuing to prop it up. Indeed, J.D. Power analysis suggests that the market has lost somewhere between four and 5 million sales during the past 18-24 months. These are transactions that would have “closed” if inventory had been available. All that pent-up demand remains in place, and it will take an awful lot to put a significant dent in it.

Even if unemploymentdoubles to 7% — which clearly would be tragic for those who lose their jobs — the effect on used-vehicle demand is likely to be moderate. The outcome of such a development would probably manifest itself in the form of more rational pricing.

The word, rational, is used with real intent. We have seen consumers and dealerships treat the most depreciable of assets — used vehicles — as a short-term financial instrument. People have literally bought and held cars and trucks like a stock at the turn of the millennium, with many speculating that value will inevitably go up over time.

We are also seeing consumers take out longer-term loans for used vehicles priced at levels that match those paid for new cars and trucks in 2019. It is a dynamic that could harm used-vehicle availability as we approach the middle of the decade. Small reductions in used-vehicle prices will leave many new- and used-vehicle owners underwater on their loans.

Unable to trade in their cars and trucks without bringing their own money to the table, this dynamic will likely prevent inventory from returning to the market as borrowers ride out the full terms of their notes. 

These are not signs of a bubble that is ready to pop but rather indicators that illustrate the complex interplay of supply and demand characteristics that will make it difficult for the market to reach 2019 pricing levels in the foreseeable future.

Jonathan Banks is vice president & general manager of vehicle valuations at J.D. Power. He will be among the speakers at Used Car Week, which starts Nov. 14 in San Diego.

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