The Covid-19 pandemic has dinged the auto sector, but one part of the industry is faring better than it was before the crisis: used cars.
Sales of used vehicles in the U.S. have roared back after dropping 38% in April, when states were shut down and some dealerships were forced to close. In June, used-vehicle sales rose 17% above the pre-pandemic forecasts, according to research firm J.D. Power.
A confluence of factors is drawing buyers to the used-car lot. Some have used federal stimulus checks on their purchases, dealers and analysts say. Interest rates have fallen during the pandemic, to about 4.73% on average for a 36-month used-car loan, from about 5% in early March, according to Bankrate.com.
Meanwhile, many dealers are having trouble getting new vehicles from the factory, after the health crisis forced auto makers to close their plants for nearly two months this spring. That has led salespeople to more readily redirect customers to the used-car lot, dealers say.
The used-vehicle market’s swift recovery is a relief for dealers and auto makers, which have seen other areas of their businesses upended by the pandemic.
“Used cars are carrying us right now,” said Chapman Dugger, a director at a dealership group with about 10 stores in Maryland and Virginia. The group’s used-car sales rose 26% in June from a year earlier, while new-vehicle sales fell 16%. Other parts of the business, including parts sales and collision repair, also are struggling because people are driving less, he said.
Meanwhile, car-company executives are relieved by a snapback in the values of used cars sold at wholesale auctions, which are in-person and virtual marketplaces where dealers and others wheel and deal. Average wholesale prices for three-year-old vehicles cratered by as much as 14% from year-earlier values in April but have recovered, according to Manheim Inc., an auction company.
A big drop in used-vehicle pricing would erode auto makers’ bottom lines. Through their finance arms, car companies own the vehicles they lease to customers, and calculate monthly payments based on an expected resale value, or residual, at the end of the lease. If the expected value of those cars falls, the auto makers must write down the value of their lease portfolios.
A decline of 1 percentage point in used-car values would shave about $300 million from General Motors Co.’s annual net income, for example, based on the size of its finance company’s lease portfolio, according to data from Moody’s Investors Service. GM finance chief Dhivya Suryadevara said during an investor conference last month that used prices have held up better than the company expected.
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A sharp rebound in used-vehicle demand has quelled concerns about falling values for now. The average wholesale price in June likely will finish at an all-time high of more than $14,600, according to Manheim, which has tracked an index of used-car values since the mid-1990s.
The retail prices that buyers pay at dealerships have been more stable, declining only 3%-5% this spring before recovering. That means dealers who were buying used cars from auctions on the cheap in late March and April enjoyed unusually big profit margins, said Jonathan Smoke, chief economist at Cox Automotive, which owns Manheim.
Dealer Peter Lanzavecchia wasn’t among them. Like many dealers, Mr. Lanzavecchia, owner of a Marlton, N.J., store that sells Hyundai, Buick and GMC vehicles, stopped buying used vehicles when the pandemic hit because he was conserving cash and fearful of sitting on a stock of rapidly depreciating vehicles.
“We backed off out of sheer fear of the unknown about where all this was going and how far values would slide,” he said.
But in recent weeks, the situation has flipped: His used-car lot is bustling, and he’s running low on inventory.
“Now we’re just scrambling to purchase more,” he said.
Mr. Lanzavecchia credits his store’s used-car rebound partly to a sharper focus on digital sales, which he said lends itself to used cars because shoppers often seek out a specific model online. Consumer interest in digital car shopping during the pandemic has lifted the share prices of Carvana Co. and other online used-car sellers.
One of Mr. Lanzavecchia’s customers, David Brigham, recently paid about $8,000 for a 2012 Hyundai Sonata sedan. Mr. Brigham’s family already has one leased car, and he considered leasing another, but he didn’t want to take on an extra car payment, he said.
“The Sonata is in great shape. It’s a beautiful car but not a lot of money,” he said. “It fits the bill perfectly.”
Used-car shoppers willing to wait might be rewarded with a better deal in the coming months, said Alex Yurchenko, senior vice president of data science at Black Book, which tracks used-car values.
He expects an influx of used cars to hit the market as rental-car companies, hit hard by a decline in travel, look to purge their fleets. Also, more people will be returning their leased vehicles to the dealership after having been granted extensions because of the pandemic.
“Our expectation is that retail prices will start to decline,” he said.
Write to Mike Colias at Mike.Colias@wsj.com
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