Auto Sales to Suffer ‘COVID Hangover’ Through Mid-Decade

Pandemic variants, supply-chain challenges and economic volatility have created a warped market for new and used vehicles and will continue to disrupt the automotive sector for the foreseeable future, according to a recent analysis from J.D. Power.

As a result, conventional indicators and benchmarks that once guided automotive decision-making will no longer be as effective in gauging key market trends to assess used-vehicle prices and valuations.

The dramatic reduction in auction volume has led to wholesale prices almost reaching parity with retail. As a result, many predictive models typically used by industry leaders for decision-making are disconnected from today’s reality. Looking back on 2021, we saw used retail markets experience an 18% price increase while wholesale prices rose by a whopping 41% from 2020 levels as auction sales dropped by an unsettling 13%. It has created a high-profit/low-volume environment for the retail side of the automotive market that is expected to continue through 2024.

It is now quite clear that the market has a way to go before returning to traditional levels. Any expectations for an economic rebound to a sense of normalcy will have to be calibrated by a better understanding of how the lingering pandemic hangover affects market dynamics.

JDPower COVID fallout chart

Unexpected Consequences of High Demand and Low Supply

Managing volatility is the new name of the game. While the summer of 2021 witnessed wholesale prices cooling off for seven consecutive weeks, suggesting that standard seasonal patterns were returning, the fourth quarter saw used prices – in both wholesale and retail markets – reverse course. They increased significantly again due to ongoing market challenges that the industry cannot seem to shake. Consequently, available used-vehicle inventories are selling at record speed – and profit margins.

Michael Hansen_JDPower

These disruptive developments have had a major impact on dealerships. It has drained the availability of vehicles that traditionally turn quickly and often are eligible for profitable certified pre-owned (CPO) programs.

This represents a massive concern for dealers that have relied on these vehicles to bolster inventory still under factory warranty. The question on executives’ minds across the entire ecosystem is: How long will this hangover effect last?

David Paris J.D. Power

Morgan Hansen (pictured, above left) is vice president-data Science at ALG, J.D. Power Valuation Services. David Paris (pictured, above) is senior manager of market insights at J.D. Power Valuation Services.