Elevated value of used vehicles is expected to hold

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Used-vehicle prices are dropping, but models are likely to hold more value through at least 2025 than they did pre-pandemic, according to experts from J.D. Power and Black Book.

Three-year-old vehicles sold for 74 percent of sticker price in the fourth quarter of 2021, according to J.D. Power — far above the previous high of 54 percent sticker set by 3-year-old vehicles in 2011.

Kristen Lanzavecchia, director of industry solutions for J.D. Power, told the Auto Finance Summit on Oct. 28 residuals had fallen in 2022, though the decline has mostly occurred in the second half of the year. Still, J.D. Power expects 3-year-old vehicles to have averaged 71 percent of sticker in 2022.

J.D. Power forecasts the true decline to occur in 2023, with residuals dropping to 62 percent of sticker. They would fall again to 56 percent in 2024, then to 55 percent in 2025, according to the company. This mid-50-percent range represents the “new normal,” according to Lanzavecchia.

“It’s really gonna be the steepest decline going into 2023, and then kind of leveling off into ’24 and ’25,” she said.

But this “new normal” still edges out what had been the previous residual record of 54 percent of sticker set in 2011, and is even farther above the pre-pandemic 50 percent seen in 2019, according to J.D. Power.

Fellow panelist Alex Yurchenko, chief data science officer for Black Book, said at the Auto Finance Summit that his company is even more optimistic about used-vehicle prices than J.D. Power.

He said “very high depreciation” began in summer 2022, with prices on 2- to 6-year-old vehicles falling close to 1 percent each week for most of the season. The market is approaching normal depreciation in the fourth quarter, Yurchenko added.

“We expect the prices to continue to drop through the end of the year and beginning of next year,” he said.

However, it will still take a while — “if ever” — for values to return to normal levels, Yurchenko said. Prices on 2- to 6-year-old vehicles peaked at more than 70 percent above pre-pandemic values, he said.

“We don’t expect prices to come down to pre-COVID levels any time soon,” Yurchenko said.

Black Book believes used-vehicle values will remain 30 to 40 percent above pre-pandemic levels for the next two to three years, Yurchenko said. He cited supply as one of the main reasons for this prediction.

The average 3-year-old vehicle in October 2019 was worth 52 percent of sticker, according to Yurchenko, who described the pre-pandemic baseline as in the low-50 percent range.

“We don’t expect to see that any time soon,” he said.

Three-year-old vehicles in October retained 73 percent of sticker price on average, and Black Book predicts this will only have fallen to 61 percent by October 2025.

“Skies are not falling,” he said. “We expect the market to remain strong for the next several years.”

New-vehicle prices remaining elevated due to low production drives used-vehicle demand, meaning used-vehicle prices aren’t going to “unravel,” said summit panelist Jeremy Robb, Cox Automotive senior director of market insights and business solutions.

With so much pent-up demand, “it’s hard for us to see that happening,” Robb said. Cox anticipates the decline will happen in a “fairly orderly fashion,” he added.

Lanzavecchia said used-vehicle prices fell in part because “we kind of hit the peak” of where they could climb. Some used vehicles were even selling for more than 100 percent of sticker, she said with a laugh, though this was an uncommon situation.

“There wasn’t much more room to grow,” she said.

Though vehicles are still largely in a “one-in, one-out” situation where anything produced is immediately sold, some automakers have been able to improve production, Lanzavecchia said. This pressures used-vehicle prices.

Robb said new-vehicle supply hit a low of 26 days earlier in 2022 but has now climbed to about 40 days. However, that remains below the pre-pandemic supply of 90 days.

When the industry was categorized by make, the supply situation was “totally different” than these macro numbers, Robb said. Some brands were above the industry average, while others were far below it.

Lanzavecchia said she thinks interest rates represent the largest factor contributing to the used-vehicle price decline. With automaker incentives low, monthly payments become more expensive, she said.

Weaker demand leads to price drops and incentive increases, Yurchenko said. Improvements in new-vehicle inventory will soften used-vehicle prices, as will a lack of growth in the economy, Lanzavecchia said.

However, J.D. Power thinks incentive spending will remain below 5 percent of sticker through about the second half of 2024, Lanzavecchia said.

Automakers might supply rental car companies or fleets before resorting to incentives, Robb said. Yurchenko said rental companies are unlikely to see significant discounts from automakers for the rest of 2022 and the beginning of 2023.

Used-vehicle supply also could remain constrained, keeping prices elevated.

Soaring positive equity on leases — vehicles worth more than the price for lessees to buy them at lease end — has kept off-lease vehicles from ending up in auctions.

“They all dried up,” Robb said. Either the customer or the dealership bought the vehicle at the end of the lease, he said.

“It’s a good deal for everybody,” he added.

Leased vehicles from the 2019 model year averaged $7,970 in positive equity in 2022 through the week of Nov. 12, according to Cox. Three-year leases of 2020 models maturing in 2022 have averaged $8,536 in positive equity this year to date. However, equity has fallen as the year has progressed. Vehicle leases ending the week of Nov. 12 on 2019 models returned $6,029 in positive equity, while 2020 model year leases ending that week carried $5,598 in positive equity.

Robb said Cox feels that the trend of off-lease vehicles failing to reach auctions will continue until positive equity drops to the $2,000 to $2,500 range on average.

“It will move the needle, like a little bit,” Robb said.

Commercial buyers also are desperate for new vehicles and have fewer models to sell into the used-vehicle market.

Rentals are probably receiving only half the inventory of what they need, said Yurchenko. This will be the case for the next six to eight months “at least,” he added.

A lack of rental supply will affect the used-vehicle market, Yurchenko said. Such vehicles are among the fastest to be sold, but that volume will not return for the next two to three years, he said.