Used market expected to slow

For the used-vehicle market, 2019 got off to a slow start before finally getting a spring bounce.

While this is a typical pattern, January and especially February were both slower than usual this year, analysts said. One-off industry events crimped used-vehicle sales at the onset of the year, including a government shutdown and bad weather, and the market also was coming off an especially strong summer.

But as tax refunds began to make their way to people's bank accounts, buyers began to show up at used-vehicle lots accordingly.

"We were expecting a bit of a roller coaster [this year], and it's already delivered that," said Cox Automotive Chief Economist Jonathan Smoke.

Now that the tax-return season is winding down, analysts expect the market to cool off. Here are some of the spring trends affecting the used-vehicle market.

There were seven straight weeks of price declines to start 2019, and it wasn't until the 10th week of the year that the spring bounce started to take hold in earnest, according to Cox Automotive. Used-vehicle values, based on Cox's 3-year-old vehicle index, rose 2.9 percent in the six weeks thereafter. By contrast, last year's bounce of 2.6 percent was smaller. But values at the time the bounce started were higher in 2018 than in 2019, Smoke said.

Tax refunds helped drive the bounce. According to Cox, citing IRS figures, total refunds through April 12 were down by 1.9 percent in volume and off by 3.1 percent in terms of overall dollars sent to taxpayers. The average refund amount dropped 1.3 percent. But Smoke said data shows that the consumers who typically drive spring used-vehicle sales are getting good refunds.

"We clearly think the real core part of the market that buys used vehicles ended up in a good position," he said.

Lease returns, expected to hit record levels this year, appear to be at that peak now, Smoke said, but the market is decelerating. Even with the high supply, demand is strong enough that prices have been only mildly affected.

"The market is getting used to seeing that supply," Smoke said. He said he expects weekly price declines of a half percent or less going forward.

Sales volumes also are likely to be peaking right now, he said, and they'll decline slightly as the year progresses.

According to J.D. Power, used-vehicle sales at franchised dealerships were on a record pace in the first quarter, at 3.5 million. That's up 5.1 percent from the first quarter of 2018.

Relatively strong sales of used vehicles continue to be driven by declining affordability of new ones. But used-vehicle prices are rising, too, with a widening chasm between cars and trucks.

Prices of used cars and trucks both increased in the first quarter — up 0.4 percent to $25,964 for trucks and 1.5 percent to $18,295 for cars, according to J.D. Power.

"The fact that there's a $7,000 — almost $8,000 — gap between a car and a truck — that's huge," said Jonathan Banks, vice president of vehicle valuations at J.D. Power.

In the first quarter, average monthly loan payments rose $13 year-over-year to $465 for used trucks and grew $15 to $369 for used cars. Those average monthly loan payments have been climbing steadily on the truck side since at least the first quarter of 2015, when they stood at $433. Used-car payments were at $353 in the first quarter of 2015, dipped to $347 in 2017 and have since been on the rise.

On the inventory side, growth is being driven especially by crossovers, Smoke said.

"If you're a consumer shopping for a crossover you've got more supply than you've ever had on both the new and used lot," he said.

At the same time, it has become increasingly difficult to find lease deals on cars such as Honda Accords or Toyota Camrys. That is boosting prices for older, used versions of those vehicles, which are also in dwindling supply, he said.

The shift in used-car and truck sales has been accelerating since the first quarter of 2015, when the two categories were nearly even, with cars holding a slight edge, according to J.D. Power figures. In that year's first quarter, both categories grew, with cars up 5 percent and trucks up 10.7 percent. Used-truck sales have subsequently grown in each first quarter, rising 6.5 percent in 2017, 9.6 percent in 2018 and 4.1 percent in 2019. That compares with declines for cars of 6.4 percent in the comparable period of 2017, 1 percent in 2018 and 8.8 percent in 2019.

Auction volume of compact SUVs soared 30 percent year-over-year to 183,756 vehicles in the first quarter, passing midsize cars, which had been the dominant segment in 2018, according to J.D. Power. Midsize cars dropped 11 percent, but still came in at a hefty 176,830 vehicles, Banks noted. Wholesale volume of midsize cars is expected to continue to decline, while that of midsize SUVs will rise, he said. That should set up some interesting dynamics for prices in these segments.

Overall, used-vehicle prices are expected to drop 1.8 percent this year, but it's after an especially strong 2018, Smoke said. If the year had continued at the pace of January and February, the decline would have been closer to 3 percent, he said. But the March bounce put prices back on track for that decline of nearly 2 percent.

J.D. Power also forecasts a 1.8 percent decline in used-vehicle prices this year, citing credit challenges, rising fuel prices and increased supply as putting downward pressure on the market.

According to J.D. Power, supply of used vehicles up to 5 years old should rise 3 percent in 2019, then decline 0.7 percent in 2020 and level off in 2021.

Another broader component affecting used-vehicle sales, Banks noted, are the growing new alternatives in buying and selling — companies such as online used-vehicle retailer Carvana and Fair, a used-vehicle leasing subscription service. Ride-hailing, too, could play a role as people who work for the likes of Lyft and Uber look to buy affordable vehicles, perhaps while working a second job. It all points to more demand for used vehicles.