It may be time to throw out the tired terms of “normal,” “new normal,” “old normal,” “above normal.” The last four years have rewired vehicle markets and remarketing segments to the point where the questions could be, “What will ever be normal again? And who defines normal if you can even find it?”
An overview of current and projected vehicle market conditions indicates a more stable picture compared to 2021-2023, but enough variables to ensure that we’ll never see the exact balance of 2019 vehicle market conditions, the last “normal” year just before COVID hit.
For starters, vehicle prices and values have been easing off post-pandemic highs, prompting ADESA Auctions US chief economist Tom Kontos to use the term, “normalizing.” He outlined three primary characteristics of the wholesale used car market:
3 Factors Defining the 2024 Wholesale Market
- A return to depreciation: Vehicles are depreciating at rates close to what they used to depreciate at, Kontos said. In the last few years, a 3-year-old car was selling for the same price as when it was new. The late pandemic peak of the chip shortage led to a lack of a ceiling on used car prices that normally would exist, which resulted in used car prices appreciating. During the time of minimal or no depreciation, a 3-year-old car was worth 90% and some at 100%. Now it’s getting back to normal, close to 60-65%, but still elevated relative to what cars would have depreciated at in 2019 at 55% value.
- Used car prices are normalizing relative to new car prices. Historically, a used car usually costs about 50-60% of the price of a new car. If a new car sold for $40,000, a used car from a franchised dealer would range $20,000 to $25,000. The prices have come down to more normal levels of discounting relative to a new car. The competition between new and used was disturbed for a while, so people were paying too much for a used car compared to sticker prices for a new car, Kontos said.
- Seasonality in the auto market is looking typical again compared to the last few years. September prices, for example, are expected to range within familiar levels. The factors that disrupted the seasonal cycles of vehicle pricing have receded or disappeared.
Kontos stressed there is still wiggle room for prices to soften, but prices are ranging close to normal.
The fallout from the higher-wage UAW contracts resulting in higher vehicle production costs will eventually affect new and used vehicle prices as well, Kontos said. “If you have an increase in the cost of a new car, that will end up in the purchase price of the consumer. It might limit the amount of demand, and make some buyers shift to used. It probably won’t be that noticeable.”
Although average new car prices have eased off their peaks in the $49,000 to $50,000 range, they are still historically high at around $48,000, causing consumers to vote with their wallets and seek lower priced cars, Kontos said. “The average price of all vehicles purchased has come down because more consumers are buying cheaper cars, which brings sales-weighted prices down,” Some consumers might decline options or buy a different type of car.
Fleet Sales Coming Back Strong
Fleet sales made up a bigger portion of new vehicle sales in 2023 at 15% market share. New vehicle sales rose by 1.7 million in 2023, with about 500,000 coming from fleet. Of those, 375,000 vehicles were sold into rental fleets.
“I think we’ll see fleet sales continue to rise especially if new car prices are higher or we see upward pressure from cost increases on the production side,” Kontos said. “If you’re not selling to retail customers, you will sell into the fleets.”
There’s a genuine need for replenished fleet sales, Kontos said. Some corporate fleets went without new vehicles for a while and couldn’t get replacements. There’s still a strong thirst for rental and commercial fleet sales, and those numbers will continue to recover. In 2019, automakers sold 2.8 million fleet vehicles, compared to 2.2 million in 2023, which means sales will continue to normalize and recover, he said.
“We’re not quite to pre-pandemic levels, and we’ve definitely got room for that number to continue to go up,” Kontos said. “There’s an incentive for manufacturers to still look at more fleet sales if retail sales are somewhat constricted.”
Challenges for Leased Vehicles and Subprime Market
Another automotive market variable at odds with previous patterns is leasing.
Jeremy Robb, senior director of economic and industry insights for Cox Automotive, predicts the market will see fewer 36-month lease maturities than usual from June 2024 forward because 2021 saw fewer leases arranged due to COVID-related production and supply chain slowdowns. Lease volume bottomed out in 2022 and started to improve in 2023, but the first wave of lower lease penetration will hit the market this year resulting in a shortage of 3-year-old MY 2021 vehicles returning to the market, Robb said.
“The number of new cars leased is still low by historical standards, which is a key supply input into the wholesale marketplace,” Robb said. “We feel the effects of that already.”
Meanwhile, new car supply and incentives are increasing and pushing prices down, as the market for CPO and newer used vehicles could face upward pricing pressure due to less available product, Robb said.
Overall, trade-in values are about 60% of the new vehicle purchase price. While down sizably from 2021 and 2022 peak values, 3-4-year-old used vehicles are still much higher on a dollar basis, Robb said. “It will take a while for values to come down. New cars are still much higher than they have been. While they can still depreciate normally for a few years, the cycle started at a higher price level. “Even as they come down, they will be higher than what people considered normal.” Those vehicles will keep feeding the used car marketplace for years to come with inflated values.
The subprime segment of the market will continue to face constraints given that many lenders left the marketplace, and interest rates will remain high amid higher-than-normal vehicle values, Robb said. He estimated the subprime share of the vehicle loan market is down to 16% from 22% during a normal market.
“It will be harder for lower end consumers to find the product they need. That’s a problem. The market is not set to decline and go back to values in 2019. What happens to interest rates this year is paramount to what will happen in the automotive marketplace and among subprime consumers who have borne the brunt of that.”
On a more positive note, earnings growth is now outpacing inflation, and as those two factors have flipped, the dynamic should be good for the overall economy and consumer wallets, Robb said.
Electric Vehicles Charged with Uncertainty
Kontos believes used values for EVs have already been uncertain for a while as EV technology will keep evolving. That means EVs coming back into the used market not only will show typical depreciation but also added uncertainty resulting in consumers reluctant to pay at typical depreciation levels on a 3-year-old EV.
Information on battery conditions and charging capacities still varies. “The improvements being made to technology make that used EV a poor substitute to what you could get if buying a new one.”
The EV selloff from Hertz and the Chicago deep EV freeze are creating turmoil in the EV market, Kontos said. He recommends calculating residuals on 3-year-old EVs based on normal depreciation plus declines resulting from other factors that make EVs worth less. “With price cuts on the front end, that immediately translates into lower used prices. We’ve seen that looking at auction data. We’re starting to see prices come down on wholesale EVs commensurate with price reductions on the new car side.”
That presents a plausible buying opportunity for fleets interested in new and used EVs, with new prices under competitive discounting pressure, and used prices reflecting the downstream effects of those lower new prices, he added.
“How do you know what to set the prices at? That must be risky. There’s so much uncertainty with future values,” he said, citing public acceptance and tax credits in addition to price cuts affecting residual values. The percentage of vehicles sold at auctions that are all-electric is still below 1.5% as of December 2023.
In the EV marketplace, Tesla will still dominate, but prices likely will continue downward because of the new EV supply and likely higher incentives among competitive EV manufacturers, Robb said.
“People are interested in what Hertz is doing and what that will do to used valuations. We have not seen them sell a ton yet. Used EV values were hit hard last year because of pricing cuts at Tesla.”
Tesla owners who bought their EVs before the massive price cut of January 2023 are taking a big hit on resale values, based on measurements of loan equity among buyers, Robb said. “People who have owned Tesla before the price cuts are very underwater from a loan-to-value standpoint, which affects trade-ins. If they leased the car before 2023, they are OK because they are not on the hook for it. Anyone who thought of trading their Tesla, when looking what it’s worth, is in for a surprise.”
Battery Solutions to Drive Robust EV Market
2024 marks the era of EV battery adjusted valuations, said Scott Case, the CEO and co-founder of Recurrent, an EV battery research and evaluation firm. EVs do not necessarily derive all their value from vehicle age and mileage, Case said.
“This is first time that EVs are being valued according to their real components and costs of components and how they degrade over time,” Case said. “From our surveys, we’ve seen high mileage cars with good batteries are attractive for used shoppers.”
Another trend emerging is the de-fleeting of the first rounds of EVs. For example, a used 2022 Tesla Model 3 with 90,000 miles could carry more value than a used ICE vehicle, given that battery conditions are not tied to odometer readings, Case said.
While Hertz is unloading 20,000 of its EVs due to declining value, high maintenance costs, and some consumer resistance, the decision is not a setback, Case said. “I don’t read that as setback for EVs at all. They went big and early. Maybe they don’t have the right charging infrastructure or refueling possibilities for large deployments and rideshare fleets. This is not them saying they are out on EVs; they are just reselling a third of them.”
Hertz will be selling many of those EVs potentially priced at under $25,000, providing opportunities for used buyers who want comparatively newer Tesla with a battery that may be in great shape.
“It’s incredible for the used EV market,” Case said. “It makes getting a 1–2-year-old EV accessible for many people. A knock against EVs has been they are too expensive and not affordable. That’s not true anymore. You can get into an EV for $24,000 and knock off $4,000 at point of sale if you qualify for the federal used EV credit.”
Case predicts 2024 will be the best year to date for used EV transactions, which at a 40% increase, will make EVs the fastest growing segment with 500,000 used EVs sold this year — twice as many sales as in 2022.
As to the big chill on electric vehicles this winter, Case points out the stranded EVs during the super cold spell in January were mostly confined to urban dwellers who do not have garages, chargers, or places to keep an EV warm overnight. Most park their EVs on the street.
“In that situation, the battery doesn’t have a warning to pre-heat itself,” Case said. “What was happening, the first 30-45 minutes the charger was pre-warming the battery. Our data shows even in extreme cold, when charging starts (on a pre-warmed battery), the extra time is only nine minutes per charging session.”
“An EV battery will use some energy to heat itself up,” Case said. “The issue people were having was they had to wait for a charger and plug in. The EV system needed to pre-warm the battery, and lines formed at charging stations.”
EVs involve a certain amount of learning and education, which isn’t embedded in the culture yet in that younger drivers don’t grow up learning about EVs from parents and grandparents, Case said. The first phase of EV ownership involves some learning as you go, with manufacturers and dealerships filling the gap.
In clarifying reports of EVs piling up on dealership lots, Case said the excess inventory was mostly confined to Ford Mach Es and Lightning pickup trucks, according to figures from S&P Global Mobility. Tesla inventory has not been accumulating, while Hyundai and Kia are setting sales records for EVs and becoming more competitive with Tesla, he said, citing S&P findings.
In 2023, EVs reached 10% of all auto sales and adoption. For this year, Case predicts EVs and plug-in hybrids (aka cars with plugs on them) will rise to 15-16% of auto sales with 2.3 million units sold.
“If you look at the 16% adoption, the split of plug-in hybrid vs. battery electric vehicles, I think more than 20% of that percentage will be plug-in hybrids, and will be more popular in the next few years as EV’s move in.”
Case also predicts as EVs gain greater market share this decades, buyers with 5-6-year-old ICE vehicles may start to lose confidence in the resale market. In countries with higher EV adoption rates where ICE vehicles are losing value, fear starts to drive purchasing decisions, with consumers concluding EVs will carry better long-term resale values than diminishing ICE vehicles, Case said.
“Every percentage point we increase on EV adoption in the U.S. will bring closer the day where average new car buyers will have a fear of declining ICE resale values,” he said.
Federal Incentive Changes to Redirect EV Market
In the U.S., a rule change on the federal EV tax credit will spur the market, since the $7,500 credit for qualifying EVs takes hold at the point of sale instead of later on a tax filing. “Now at the point of sale, even if you don’t have much tax liability, you can take the whole discount when you buy the EV,” Case said.
Meanwhile, stricter rules allowing the credit to only apply to American-built and sourced EVs, reduces the list of models qualifying for the credit. That has spurred a rise in EV leasing, which may be more appealing to purchasers trying EVs for the first time.
“When you lease an EV there are no restrictions on the manufacturing location and battery and parts sourcing,” Case said. “The leasing company gets the full tax break, and they are passing through the savings to the down payment and lease terms. That will put more EVs three years from now into the remarketing funnel than expected.”
In a related rule change, the used EV tax credit of $4,000 on cars $25,000 or below also switched to point of sale on Jan. 1, 2024, which makes them more attractive to income qualified buyers. Would this recalibrate the lower end used EV market, in that remarketers will favor setting floor prices low enough for used EVs to qualify for the credit and stay below a $25,000 resale prices? Case asked. “Those above the $25,000 retail cut off will be tough to sell.”
Negatives & Positives of EVs
Another trend to track is the growing demand to move electric vehicles, which are significantly heavier than internal combustion engine (ICE) vehicles, said Jamye Carpenter, the co-chair of the AI sub-committee for the International Automotive Remarketers Alliance (IARA). Hauling EV batteries will require hazmat certification for transporters because of fire risks, although the chances of an EV battery fire are very low.
“There are still a lot of negatives around EVs as consumer facing vehicles,” Carpenter said, citing the recent decision of Hertz to eliminate thousands of electric vehicles from its rental fleet. The EV manufacturers and suppliers should better inform consumers properly on charging, range, and overall operation of an EV. “There’s some education that needs to be done around EVs to say it’s not such a scary thing,” said Carpenter, who added, “this Alabama girl drives a Tesla.”
“If you run the batter down to 0%, it won’t blow up on you. If you can use a smartphone, you can drive an EV.”
Growing global competition among EV manufacturers will put further demand on transport and logistics as more models are imported into the U.S., which can disrupt the market, said Jay Wertzberger, founder and host of the ATI Auto Business YouTube channel and a remarketing industry media influencer.
Ready for Artificial Intelligence?
Artificial intelligence (AI) is one technology trend guaranteed to gain traction in many facets of business operations. AI is changing how auctions and other remarketing operations are inspecting vehicles and generating condition reports (CRs), Carpenter said. “Our committee is researching different companies that use AI to see how they apply it. Some companies are really diving in and taking advantage of AI, while others are sitting on the sidelines waiting to see how it works with other companies.”
Carpenter has observed that plenty of businesses want AI as part of their processes but still hesitate in working to train AI. “You can’t have it without training it. You must have willing participants who take time to work with a company.”
While AI cannot be phased in all at once, the use of the technology at least can increase the number of CRs while helping auctions best use and assign their employees in a tight labor market, Carpenter said.
“You have hourly wage employees who work non-stop in crazy environments to get CRs written,” Carpenter said. “Everyone is excited (about AI), and everyone wants it, but not many people are jumping in to be first or part of the process that leads to a solution.”
AI adoption at first will need the support from a large group or network of auctions that can work closely with the IARA and the National Auto Auction Association (NAAA) to ensure wider use in the remarketing industry, Carpenter said. AI can lead to better and more accurate vehicle prices as well as provide a deeper, more transparent look at wholesale vehicles that dealers want to buy.
Digital Tools Easing Costs
Citing the recent closure and layoffs at online used car dealer Vroom, Wertzberger said vehicle operations and remarketers need to ensure they control rising costs for transportation, logistics, and reconditioning. Such services are becoming more competitive as demand rises with the increase in digital vehicle transactions, he added.
Whereas most vehicles were mostly shipped in bulk with eight or nine on a carrier, digital access and marketplaces have enabled more “onesie” and “twosie” vehicle purchases nationwide that involve transport from far-flung locations.
“Digital solutions are out there, but also the hard costs now because there is so much digital activity out there,” he said. For example, now you are shipping two Honda Accords from different states instead of nine. You’ve increased how much you are paying. Buyers need car shipping integration tools that give them the actual shipping rates before they buy.”
Digital tools will also help integrate vehicle shipping with related services in real time, allowing for more efficient allocation of resources and reduced costs from bundling services and fees, Wertzberger said.
“If you can help them wrap transportation and logistics and recon costs, you can help the buying side and help move volume. Digital tools can streamline process and manage costs.”