Will the Used Car Market Crash? A Look at Dynamics Across the Auto Industry in 2024

March 11, 2024

The COVID-19 pandemic transformed many industries, but few were as impacted as automotive. New vehicle inventory dropped to historic lows between 2020 and 2023, sending prices skyrocketing as the limited supply combined with stimulus payments, low interest rates, and a thriving economy kept consumer demand high.

 Fewer new vehicles meant that demand for used cars spiked, too. But now things have shifted, and the question on the minds of many dealership owners and executives is: Will the used car market crash in 2024 and beyond?

High Interest Rates Send New Cars Into Decline

In the first quarter of 2024, new car production climbed back closer to historic norms, and now dealers are seeing inventories climb at faster-than-anticipated rates. There are several driving factors behind this including limited manufacturer incentives and persistently high interest rates.

 Between the start of 2012 and the middle of 2022, average interest rates on a 5-year car loan reached no higher than 5.37%. Things changed dramatically after that, with average rates climbing to 8.15% by November 2023. Naturally, these higher interest rates place significant downward pressure on consumer demand for new cars.

How Dealers and Manufacturers Will Respond

Inventories have climbed rapidly but are actually hovering near pre-COVID levels — the industry has just been conditioned to having less inventory and carrying lower costs. As these lots fill up, expect pricing to become more competitive and manufacturers to reintroduce incentives to help move the metal. The need to move inventory, combined with a resilient economy, lower interest rates, and cooling inflation will create robust new car sales, though with reduced margins for everyone.

 With a favorable environment for new vehicle sales and fewer new vehicles being turned in because of low inventory levels the past 3 years, challenges for the used car market seem inevitable.

What This Means for the Used Car Market

Several pandemic-era factors are now working against the used car market.

 Fewer new cars were sold between 2020 and 2023. That means there are now fewer used cars between 12 and 48 months of age, which is the sweet spot for used car dealers. This adversely affects used car inventory.

 Leased vehicles and vehicles purchased for fleets also came down between 2020 and 2023 because the inventory wasn’t there. Traditionally, former leases and fleet vehicles represent a significant source of supply for used car dealers. This further impacts used car inventory.

 Strong deals and incentives for new vehicles will entice prospective used vehicle shoppers to consider new cars.

 These dynamics will create a used car market with low supply and mediocre demand, but the low inventory should keep prices and margins relatively strong.  

 According to our most recent Market Outlook Report, about 25% of consumers have delayed auto purchases due to higher rates over the past two years. If the economy remains strong, if interest rates fall, and if dealers and manufacturers remain measured in their incentives, there could be enough demand to go around — both for the new and used car markets.

What Dealers Should Be Thinking About

In 2024, dealers will go back to the grind and look to their teams to manage costs efficiently and effectively. Predictability will return to new vehicle inventories and margins, enabling variable ops to be more easily managed. The downside is that growth and profit in that part of stores will be hard to find.

 Cost management and especially diligence related to floorplan costs will be critical to success in 2024, as will maximizing revenue from fixed. Dealers who have focused on great customer service and cultivated fixed ops business will see those efforts pay off this year.

Learn More About Automotive Trends For 2024

While the US auto industry is entering a new normal for 2024, the DCG Market Outlook Report predicts that 2024 “won’t look quite as attractive as it did in 2023, but better than it did (for manufacturers and dealerships) in 2019.” This makes 2024 the most important financial performance year for determining dealership values in a very long time. To create your strategic roadmap for a profitable and sustainable year, speak to a DCG Advisor.