McLEAN, Va. -

The used-vehicle market performed very well through the first half of 2019.

Used-vehicle prices have, on average, risen 2.1% compared with the same period in 2018 as new-vehicle prices have risen and supply has slightly declined.

The strong showing in the used-vehicle market illustrates just how volatile the macroeconomic picture has been. In January, the market consensus on used-vehicle projections was cautious due to anticipated increases in interest rates, growth in the supply of used vehicles, tighter credit conditions and pressure from new vehicle incentives due to a slow-down in retail sales.

What a difference a couple of quarters have made! Rather than seeing interest rates and incentives increasing, both variables have been flat to down slightly. These factors along with rising new-vehicle prices and sustained used-vehicle demand have helped create an environment that supports used-vehicle prices.

Looking ahead to the rest of the year — and barring any major surprises in the global economic picture — we expect used-vehicle prices to stay the course and outperform fiscal year 2018 by a slight margin.

Specifically, we expect prices to increase by a little less than 1% — even as we account for normal seasonal softening as we move past the summer months — before leveling off in 2020.

Segment by segment analysis

  • The mainstream passenger segment of the used-vehicle market has been remarkably strong. A year-over-year assessment of this category shows that it has outpaced SUV counterparts, with affordable, small, compact, and midsize car segment prices increasing the most this year.
  • While we have seen large SUV and mainstream SUV segment prices also rise slightly, it has still not quite matched the performance of their passenger car counterparts.
  • On the luxury side of the equation, we're seeing a reversal of what is taking place in the mainstream vehicle segment. Premium segment prices are down across the board, due to the elevated levels of wholesale volume of vehicles that are returning to the marketplace.

Affordability issues drive market dynamics

At J.D. Power, the watchword for 2019 has been affordability. Over the last several months we have seen this factor — above all others — affect the purchase decision making process for consumers across regions and demographic segments.

That said, an analysis of the Power Information Network (PIN) from J.D. Power, which provides real-time automotive information and decision-support tools based on the collection and analysis of daily new- and used-vehicle retail transaction data from thousands of automotive franchises, reveals that Gen Z (Gen Z born between 1995 -2015, Millennial born between 1980-1994) and Millennials have emerged as the most important age groups when it comes to purchasing used vehicles.

Younger buyers, in particular, are gravitating towards economical vehicle choices, and have contributed the most to driving demand for — and hence price increases in — the smaller used-vehicle segments.

Complexity and volatility require vigilance

While our outlook for the used-vehicle market is stable — and even slightly optimistic — for the balance of 2019, the macroeconomic picture will remain in a constant state of flux and subject to variables that are sensitive to major developments that are making headlines daily.

Because used-vehicle sales are likely to be more resilient to changing market forces compared to new vehicles, it will be critical for dealers to optimize used vehicle operations. Agility — quickly adapting to sudden changes in demand patterns from different demographic and regional markets — will play an important role in achieving sales objectives through any increase in market volatility.

A case in point: while financing and insurance (F&I) income on each used unit sold is similar to what is taking place on the new vehicle market (about $990 for passenger cars and $1,150 for trucks, SUVs, and vans), dealers are clearing significantly higher profits from used vehicles on a per unit basis.

Specifically, used vehicles are clearing $1,000 for each car sold — and around $1,200 for each truck, SUV or van sold — compared with approximately $120 for new passenger vehicles and $500 for new trucks, SUVs and vans.

In short, buying the right used-vehicle inventory at the right price will optimizes profits and turn rates while hedging dealers against potential market volatility.

David Paris is an executive analyst at J.D. Power Valuation Services.

For more context and updated trends around this analysis, see our recent podcast with Paris below.