Where is the Car Market Headed From Here?

The car market overall is in a weird spot heading into 2023. Car dealerships were selling used cars with vigor in 2021, then in 2022, new inventory started to ramp up, but often with steep prices. Now, the average car dealership is buckling down for 2023 to be a year of caution and diligence.

Could Used Car Demand Fall Off a Cliff?

Some say that it’s possible for the demand for used cars to fall off a cliff. With rising interest rates and fewer people able to get car loans, used cars could be very hard to get ahold of come 2023. Experts aren’t sure when this destruction of demand could happen, but recession speculations and signs of a longer slowdown are pushing car dealerships to start getting ready. Traditional dealerships and online dealerships like Carvana have already started making cuts. Carvana cut 8% of its total workforce. By the end of the year, interest rates will be the highest they’ve been since 2001, which is already creating shock waves throughout the economy. The rising rates mainly hurt consumers with poor credit who often can only afford to buy used cars. However, despite these negative conditions, some experts doubt that used car demand will fall off a cliff due to the continued constraints on the supply chain for new cars.

Car Dealerships Adjusting Acquisition Strategies

It’s crucial for a car dealership to adjust their acquisition strategies and ensure that they’re still sustainable for the upcoming market. Experts say that car dealerships should be careful not to overpay for vehicles that require a lot of work. A good way to cut costs is to buy used cars via trade-ins or by getting consumers to come into the car dealership and sell their vehicles. Some dealerships have managed to switch almost entirely to buying cars from consumers rather than at auction. A car dealership’s per-vehicle gross profit can be at least 20% higher on vehicles bought from consumers. Another problem on the used side is the pipeline problem. There were up to 6 million fewer new vehicles produced last year, which means that car dealerships will soon see that lack of volume on the used side.

New Inventory Filling Out as Prices Rise

Unfortunately, as new cars become more widely available, loans are now more difficult to get for many Americans. Consumers are finding that financing a car no longer fits into their budget. This is especially true for people with lower-than-average credit scores. The worst part is that financing costs are expected to keep rising. Automakers might consider offsetting costs with various deals and discounts, but many have said they don’t want to do that. On the other hand, fleet demand has risen, which is a better sign now than it has been in the past.

All signs point to 2023 being an interesting year for the market and the auto industry. But no one has a clear picture as of yet.