Used Car Prices Finally Start to Normalize After the Pandemic Madness

Remember when a three-year-old Honda Civic with 40,000 miles was selling for more than its original MSRP? I do, because I watched it happen on my own lot in the spring of 2022 and felt like the entire industry had collectively lost its mind. Well, the Manheim Used Vehicle Value Index finally confirmed what most of us on the ground had been feeling since late 2022 — the correction is here, it is real, and it is not going to reverse. The index dropped roughly 14 percent from its January 2022 peak through the first quarter of 2023, according to Cox Automotive's data, and while that sounds alarming on paper, it is really just the market exhaling after holding its breath for three years.

What triggered the normalization was exactly what everyone predicted but nobody could time accurately — new vehicle production finally caught up. The global semiconductor shortage that choked inventory from mid-2020 through most of 2022 gradually eased as TSMC and Samsung ramped chip production, and the major OEMs pushed record numbers of new units into the pipeline starting in Q4 2022. According to Bureau of Economic Analysis figures, new light vehicle sales hit an annualized pace of roughly 15.5 million units in the first half of 2023, compared to the pandemic trough of about 13.5 million in 2022. More new cars on dealer lots meant more trade-ins cycling through, which meant used car supply finally started catching up to demand for the first time since before COVID changed everything.

The interesting wrinkle — and this is what I keep telling the younger managers on my team — is that "normalization" does not mean "cheap." Prices are falling from an absurd peak, but the new floor is still significantly higher than pre-pandemic levels. iSeeCars published an analysis in May 2023 showing that the average used car was still approximately 30 percent more expensive than the equivalent vehicle in January 2020, adjusted for age and mileage. So if you are a buyer who sat out the market hoping for a crash back to 2019 prices, I would not hold your breath. The combination of persistent inflation in labor and parts costs, higher floor plan rates for dealers, and a consumer base that got accustomed to paying more has created a new pricing reality that I suspect is permanent, or at least as permanent as anything gets in this business.

For used car professionals specifically, the correction presented a classic margin compression challenge that separated the disciplined operators from the cowboys. The dealers who were paying too much at auction during the feeding frenzy of 2021 and 2022, banking on continued appreciation to bail them out, suddenly found themselves underwater on aged units that were depreciating faster than their carrying costs. I personally know three independent dealers in the Southeast who went out of business in the first half of 2023 because they were sitting on sixty-day-old inventory purchased at peak prices with floor plan rates that had doubled since they last did the math. The lesson, as always in this industry, is that discipline in acquisition is what keeps the lights on — not the hope that the market will keep going up forever. It never does.

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