In recent years, the used car market has faced significant shifts, presenting both challenges and opportunities for dealers and consumers. As we progress into 2025, industry experts are closely monitoring these changes. Jonathan Banks, a prominent figure from J.D. Power, delves into the complexities surrounding supply shortages, affordability issues, and strategic moves that can help dealers remain competitive. The market is experiencing a critical juncture due to fluctuations in vehicle availability and pricing pressures.

Market Insights and Key Developments

In the wake of the pandemic, the automotive sector witnessed a dramatic reduction in new vehicle sales, which plummeted from an average of 17 million units annually between 2016 and 2019 to approximately 13.7 million in 2020 and 2021. This decline has had a lasting impact on the availability of used cars. However, there has been a gradual recovery, with new vehicle sales rebounding to 15.5 million in 2023 and 16 million in 2024. Manufacturers have introduced various incentives and discounts to stimulate demand.

Despite this resurgence, the pricing of used vehicles remains under pressure. Affordability continues to be a significant concern, as vehicle prices have escalated beyond the pace of wage growth. Consumers trading in their used cars at franchised dealerships now hold an average equity of $4,800, nearly double the pre-pandemic levels. Yet, sticker shock persists, affecting real purchasing power. Younger buyers, especially those under 35, are delaying purchases due to financial constraints, lifestyle changes, and alternative transportation options.

Dealers face intense competition for quality used inventory, with franchise dealers vying against independents and major retailers like CarMax and Carvana. Banks advises dealers to adopt more precise sourcing and pricing strategies, focusing on specific vehicle features to maximize profitability. With lease maturities at historically low levels, securing top-tier used vehicles will become increasingly challenging. Nonetheless, adapting to these evolving conditions is crucial for maintaining profitability.

From a broader perspective, this scenario underscores the importance of adaptability in the automotive industry. Dealers must continuously refine their strategies to meet changing consumer needs and market dynamics. For instance, offering more affordable, older-model vehicles could attract budget-conscious buyers. In essence, the ability to navigate these challenges will determine success in the ever-evolving used car market.

As Jonathan Banks aptly noted, the average payment for a used car through franchise dealers now rivals what a new car payment was in 2019, highlighting the remarkable transformation within the industry. This shift calls for innovative approaches and a deeper understanding of consumer behavior to thrive in the current landscape.