At the end of 2022, used-vehicle prices were starting to slow from unusually high rates, and inventory levels were on the upturn — as the auto market and consumers tried to navigate the results of the Fed's latest interest rate moves.

Cox Automotive kicked off 2023 by exploring many of these trends as well as forecasts for the new year during its 2023 Cox Automotive Industry Insights and Sales call. Chief economist Jonathan Smoke and other Cox leaders contemplated a “new dawn” for the auto industry, along with a deep dive into the economy and market.

“Clearly what we have been through since 2019 is anything but normal. However, I am happy to report that normal may not be too far off as supply is normalizing in wholesale, just like it has in retail,” Smoke said during the call.

Wholesale depreciation larger than ever

The non-adjusted wholesale price change in December for the Manheim index saw a decline of 1.9% compared to November, moving the unadjusted average price down 13.1% year-over-year.

Experts said 2022 ended with the Manheim index sitting at 219.3, which is a slight increase from November, but a downturn of 14.9 percent for the year (on an adjusted basis).This was a record drop for index, but perhaps not unexpected considering the unusually high prices the industry saw amid COVID shutdowns.

Chris Frey, senior customer consulting manager at Cox Automotive, shed some light on movement in pre-owned pricing and how these shifts apply to trends in used inventory.

There has been a nearly 80% decrease in the 21 months on the Index from April 2020 to January 2022.

“We expect to see continued softening in this series through the first quarter, and perhaps into the second,” Frey said.

One factor Manheim is watching carefully is the impact of interest rates on consumers, and how that affects buying and pricing.

“It’s a good sign prices are retreating from highs, making these used vehicles more affordable going forward despite interest rate increases,” Frey said during the call. “But we also need to be aware that continued low inventories may not bring prices down enough to spur substantially more demand.”

Jeremy Robb, senior director of Cox Automotive, weighed in on the depreciation conversation, and resale values during the call. Resale values in the wholesale marketplace continue to decline, but still are 30 basis points higher than normal in the fourth quarter.

“Early in the year, we experienced more normal patterns of depreciation … but since June, the weekly patterns began to diverge from historical norms. Q3 was stronger than normal, and Q4 continued the trend, with weekly declines averaging about 70 basis points,” Robb said. “Even in December, when depreciation patterns typically flatten, we saw continued declines in values, as interest rates and consumer confidence continued to decrease the demand for used vehicles.”

Frey said the company is expecting to see this pattern continue for the next several months.

Interestingly, 2022 depreciation patterns in Q4 across all vehicle age groups were fairly consistent, dropping by an average of 7.1% in Q4.

“In our data from 2014-2019, we would typically see a range of MMR values across all model years of about 6 points in the fourth quarter,” said Robb. “But this year, the average is only 2.6, as the forces that were impacting wholesale values affected all age brackets — and all types of vehicles.”

Compare that to 2022, during which the variability in performance by age group is easily seen, with older units outperforming new and 2- to 3-year-old models.

“As we reached the end of May, which corresponded with the first Fed hike of 2022, declines across these brackets continued to become very uniform as inventory market trends converged,” Frey said.

As interest rates rose throughout the second half of the year, many consumers that wanted or needed to purchase a used unit were forced to make trade-offs. Early in the year, some of those trade-off decisions drove changes in purchase patterns, which increased demand for compact units over higher, gas-guzzling SUVs and trucks.

But then in the second half of the year, even with gas and oil prices dropping, the rise in interest rates outstripped any price impact, continuing to drive average payments higher.

Consequently, at the end of the year, across all model brackets, compact cars outperformed other groups with prices declining only 15% in 2022.

Manheim contends the market will still see above-normal depreciation for the second-straight year in 2023 as it begins to normalize after record highs.

That said, price trends should normalize more in the year’s second half, “as constrained wholesale supply supports used values and used-retail prices fall into a normal relationship with new prices,” Manheim reported.

‘Supply situation’ continues to dominate

In 2022, the “supply situation” was the dominant story, and this won’t change as we enter 2023. Retail supply is currently improving for new and normalizing for the used market, Smoke said.

Days’ supply for used moved up one day year-over-year in December. The used market is experiencing the impact of declining demand, as more competition from the new market grows right along with new-car supply.

In fact, there was even a point of over-supply in the used market this past spring. That said, at the end of December, used inventory was still down by 22%, with used days’ supply in line with 2019.

On the wholesale side, some said commercial supply is moving up, albeit slowly — with the economist going so far as to liken the trend as moving at a “snail’s pace.” Repo check-ins have finally picked up a bit closer to normal, as well.

“High vehicle values, policies concerning consumers, and the lack of new-car supply into rental companies have converged to greatly impact check-ins to auction over the past couple of years,” said Robb. “However, we are seeing light at the end of the tunnel, especially as to how it relates to repo and off-lease volume.”

But it will be a long time until the industry reaches normal levels, especially when it comes to off-lease supply.

Lease penetration in the industry has fallen from 25% of sales to almost 15%. This means there are fewer leases to mature each month and come back to dealers or to the wholesale market — a trend which will be felt from now through 2025.

“This drop in supply will be felt over the next few years and may help to mitigate some of the pressure we could see from other factors that would decrease the value of near-new wholesale vehicles,” said Robb.

Recent declines in wholesale supply have been largely due to trends in the commercial market, as leasing and off-rental supply flowing into the wholesale market decreased significantly.

“Expect a very constrained market with extreme scarcity in 1–3-year-old vehicles for several years to come,” said Robb. “Volumes are now coming down… and 2023 will see a decline from fewer lease maturities leading to less off-lease arbitrage and fewer traders also leading to fewer consignments.”

That said, even with declines in dealer volumes, dealer volumes will continue to dominate the wholesale market, according to Manheim forecasts.

During the Q&A portion of the call, listeners were also focused on inventory levels and pricing.

“For the most part, inventory has held up pretty well through the past two quarters, a little bit better than expected sales pace in Q4, which is a little bit odd, but ultimately, it looks like inventory is pretty much in line with that our data says our days’ supply’ was what we saw back in 2019,” said Frey. “I think one of the key themes for people to keep in mind is interest rates really stop a lot of people or delay their purchase decisions — new or used.”