Despite the jump in tax refunds, crucial for down payments, used car & truck retail sales fell, and auction prices dipped as price resistance set in.
By Wolf Richter for WOLF STREET.
The number of used vehicles sold retail by dealers in March fell by 15% from March last year, according to estimates by Cox Automotive, based on its Dealertrack data. Blame slow tax refunds? Blame the unsustainable crazy price spike? So let’s see.
Tax refunds are crucial to the used car business this time of the year. They make great down payments. And the whole industry counts on them and parses them.
Based on IRS data through April 1, the IRS issued $204 billion in refunds, up by 13.4% from the same period last year, with 98% being direct-deposited into the taxpayers’ bank account, and so they already got this money.
The number of refunds issued rose 1.7% from a year ago, to 63.36 million refunds through April 1. The average refund amount jumped by 11.5%, to $3,226, a great down payment for a car.
So, 1.7% more people received their refunds than last year at this time, and they received much bigger refunds on average, making for potentially more and bigger down payments – and that’s why the number of used vehicles sold in March should have at least matched last year’s total. But sales fell by 15%.
And that’s where the crazy price spikes come in. The entire industry has been shaking its head about them: That retail customers paid those prices though there was plenty of supply; that dealers then bid up prices at wholesale auctions to ridiculous levels, knowing that they could pass on those prices to retail customers and make massive per-vehicle gross profits; and that lenders accepted the ridiculous collateral values and lent. And everyone, astonished as they were about this bizarre phenomenon, played along for as long as possible.
But in March, wholesale prices of used vehicles that were sold at auction fell 3.3% from February on a mix-, mileage-, and seasonally adjusted basis, according to the Manheim Used Vehicle Value Index. Manheim, a unit of Cox Automotive, operates wholesale auto auctions around the country and online, that handle around 8 million vehicles a year.
Compared to March last year, which was already in the middle of the spectacular price spike, prices were up by 24.8%, a huge ridiculous jump, but it was the smallest year-over-year jump since August 2021.
It takes about a couple of months for wholesale price changes to show up in retail prices as tracked by the Consumer Price Index for used vehicles.
The March CPI will be released next week. In February, the used vehicle CPI was up 41% from a year ago, which prior to this era was an all-time fantastical record spike. But there was already a slight dip from January:
That used vehicle sales — in terms of the number of vehicles sold — are down despite the jump in tax refunds shows that there is growing, though still feeble, resistance among retail buyers to those all-time fantastical record price spikes.
The high-pressure steam was starting to hiss out of the market in November, which became apparent in the underlying metrics, and those metrics weakened further in December. In January wholesale prices were flat for the first time since August, seasonally adjusted. And in February, prices dipped 2.1%, seasonally adjusted. And now in March, they dipped 3.3% seasonally adjusted.
Not seasonally adjusted, the index rose 0.6% from February, which is below the normal seasonal increase from February to March, the tax-refund season.
Manheim’s Three-Year-Old Index, which is not seasonally adjusted, had dropped 5.9% from the beginning of the year through week 10, a far deeper drop than in prior years back through 2014. Over the past four weeks, it increased by 1.2% but remains down about 4.5% for year so far. And even the $204 billion in refund tax dollars that have now flooded the land have barely moved the needle.
And there is another underlying metric that points at price resistance: The average daily sales conversion rate at Manheim auctions in March, at 57.1%, was below the normal level for this time of the year. For example, in March 2019, it averaged 62.7%, according to Manheim. The lower-than-normal conversion rates started last November and indicate that buyers have more bargaining power, that there is less interest and less competition for vehicles at those prices.
And there is plenty of supply of used vehicles on dealer lots. At the end of March, dealers ended up with a supply of 44 days, up from 32 days a year ago, according to Cox Automotive. By comparison, the average supply in 2019 was 48 days (purple line):
Price resistance means it will be harder to maintain the sales volume at those ridiculous prices. Lower – though still ridiculously high – retail prices would increase sales volume. But the limit will be supply. There is plenty of supply at the current sales volume. But a higher sales volume would exert more pressure on supply.
And used vehicle supply is constrained by the reduced production volumes of new vehicles over the past two years. The chip shortages continue to hamper production this year. Big fleets, such as rental companies, feed the used vehicle market with millions of vehicles a year, but they’ve had trouble getting new vehicles, and they’re hanging on longer to the vehicles in their fleets. And the number of new vehicles sold plunged 26% in March compared to a year ago, and so trade-ins are down — another major source of used vehicles. So used vehicle retail prices may finally drop but are unlikely to plunge all the way back to earth in this crazy environment.
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