Used vehicle prices ease from tariff fear-buying highs but remain elevated

The Manheim Used Vehicle Value Index decreased 1.5% from April to May, signaling a slight cooling in wholesale used vehicle prices after a strong April, though prices remain 4% higher year-over-year. While wholesale prices softened, retail prices have been slower to follow, and overall demand remains relatively strong due to low inventory levels of 2.2 million vehicles and consumers holding onto their cars longer amid ongoing production constraints.

Analysis

The U.S. used vehicle market experienced a slight moderation in wholesale prices in May, with Cox Automotive's Manheim Used Vehicle Value Index declining 1.5% from April. This follows a period of strong appreciation in April, which saw the index reach its highest level since October 2023. Despite the monthly decrease, wholesale values remain robust, standing 4% higher than the previous year. Retail prices for consumers typically trail wholesale trends but have exhibited slower declines in recent years. Underlying demand for used vehicles remains relatively strong, significantly influenced by persistently low inventory levels, currently at 2.2 million units, which is below historical norms. This scarcity is attributed to consumers retaining their vehicles for longer durations and reduced new vehicle production stemming from the pandemic and subsequent global supply chain disruptions. While President Trump's proposed 25% tariffs on new imported vehicles and parts do not directly affect used car sales, they can indirectly influence the used market by altering new vehicle prices, production, and overall demand. Retail used vehicle sales in May decreased by 3% compared to April but showed a year-over-year increase of 4%, indicating sustained consumer interest. Cox Automotive has observed a trend towards stabilization in used vehicle prices during 2024, following several years of significant volatility.

Key Decisions for Investors

• Investors should monitor the evolving spread between wholesale and retail used vehicle prices, as a persistent lag in retail price adjustments could impact profitability for automotive retailers and lenders.
• Given that demand remains firm and inventory levels are constrained, continued support for used vehicle valuations is likely, which could benefit companies with significant exposure to used vehicle assets or financing.
• Closely watch for potential indirect impacts of new vehicle tariffs and production constraints on the used car market, as these factors can shift demand dynamics and pricing power within the sector.