As talk of a recession continues throughout the news media, it’s crucial for car dealers to re-evaluate their role in the wider market and adjust their strategies for the next year accordingly. While dealers who survived the previous economic downturns of 2008 and 2020 may have certain expectations about what a recession means for business, experts speculate that the potential recession at the end of 2022 and throughout 2023 will see a departure from the used car market trends of the past¹. In fact, car prices during recessions in the past may be markedly different from what the industry is about to see. 

How Recessions Work

At the most basic level, a recession is defined as two or more consecutive quarters of widespread economic downturn. This change in economic activity is often reflected in a similarly decreasing gross domestic product (GDP). In the United States, both criteria have been met, and record-high inflation rates have led to the Federal Reserve drastically increasing interest rates over the last year². This combination has many experts predicting an extended recession throughout the next year at least.

How the Used Car Market Usually Responds to Recessions

The Impact of Increased Interest Rates on Auto Sales

When the Federal Reserve increases interest rates to combat inflation, it’s typically to discourage spending on borrowed money. Higher interest rates make it more expensive to pay back loans, and people and businesses are less eager to borrow money if it’s going to cost them more in the long run. The area where this impact is most visible is in the housing market. Mortgage rates have increased by about 6% over the course of 2022³, which means taking out a home loan is now significantly more expensive and less accessible.

While personal and auto loan interest rates are tied to the borrower’s credit score, rate increases for these financial products can cause the car market to slow down. Even a short-term loan with inflated interest rates could mean paying thousands of dollars over sticker price by the end of the loan term, so consumers tend to put off buying both new and used cars.

Supply and Demand

In previous recessions, this sudden drop in demand for used cars was bad news for dealers. Left with an abundance of supply during a time of record low demand, dealers saw vehicles sitting in full lots for months at a time and were forced to lower prices to compete⁴. For car prices to be appealing during a recession, they need to be low enough that buyers feel confident in their ability to finance a major purchase at a time of economic uncertainty. This has caused the used car market to suffer greatly in the past.  

Why This Time May Be Different

Changes in the Supply Chain

The recession of 2008 came at a time when the supply chain was functioning at full capacity. The downturn of 2020, spurred by global lockdowns amid the COVID-19 pandemic, led to notable and long-lasting disruptions. As economic activity recovers, businesses have shifted the ways they approach and manage their supply chains—and many industries, such as automotive manufacturing, are still not producing at levels as high as pre-pandemic norms. Because the circumstances are so different this time around, contemporary used car market trends are unlikely to follow those of the past⁴.

Even though production in the automotive industry has been ramping up over the last year, many dealerships have still not returned to functioning at full capacity. The unprecedented supply shortage of vehicles that peaked in 2021 is still being felt across the country, meaning dealers still have fewer cars on their lots than expected⁵. Now, it’s possible that even a recession’s deflated demand will outstrip the limited supply dealers have been receiving. Used cars are still both desirable and in low supply, meaning used dealers are well-situated as the market moves into 2023. 

Post-Pandemic Consumer Priorities

When air travel was heavily restricted during the first year of the pandemic, consumers turned to cars as their default mode of transportation for all travel. This increased reliance on cars made having the latest and most advanced features more important, and people started seeking out higher trim levels than previously⁶. This means more technology included in each vehicle—and greater demand for the scarce semiconductors that have caused bottlenecks in the supply chain for the past few years. 

Demand for vehicles is likely to start waning as air travel becomes more available and inflation rises, but consumers’ priorities in a vehicle are likely to stay high. Even as dealers see a decrease in sales, they will likely see demand concentrated into the highest trim levels, which are the most profitable to get off the lot⁶. This should help cushion the decrease in sales of both new and used cars in the coming months. 

Meet Customer Demand With ACV Auctions

As you shop for used cars to stock your lot, it’s important to know what you’re getting. ACV Auctions offers comprehensive condition and market reports so you can be confident in every purchase. Join today to set up your watch list and start bidding on the quality used vehicles your customers want. 

Sources:

1. Dunham, N. (5 July 2022) Dealers Unlikely to Feel Recession. Wards Auto. Retrieved October 26, 2022 from  https://www.wardsauto.com/dealers/dealers-unlikely-feel-recession

2. Implementation Note issued September 21, 2022. Board of Governors of the Federal Reserve System. Retrieved October 26, 2022 from https://www.federalreserve.gov/newsevents/pressreleases/monetary20220921a1.htm

3. Olick, D. (26 October 2022) Mortgage demand from homebuyers is now nearly half what it was a year ago. CNBC.com. Retrieved October 26, 2022 from https://www.cnbc.com/2022/10/26/mortgage-demand-from-homebuyers-is-nearly-half-what-it-was-in-2021.html

4. Ozarowski, C. (19 September 2022) Do Prices Go Down In a Recession? Here’s What Usually Gets Cheaper. NASDAQ.com. Retrieved October 26, 2022 from https://www.nasdaq.com/articles/do-prices-go-down-in-a-recession-heres-what-usually-gets-cheaper

5. Wayland, M. (7 October 2022) New cars are finally back in stock—but Americans might not be able to afford them. CNBC.com. Retrieved October 26, 2022 from https://www.cnbc.com/2022/10/07/new-cars-are-finally-back-in-stock-but-they-come-at-a-steep-price.html

6. Butters, J. (10 July 2022) Nothing to fear but recession talk. Automotive News. Retrieved October 26, 2022 from https://www.autonews.com/commentary/hard-gauge-impact-potential-recession-auto-industry