VEHICLE DEFLATION IS PUTTING THE BRAKES ON THE USED-CAR MARKET

Right before the global financial crisis, former Citigroup Inc. Chief Executive Officer Chuck Prince famously said that as long as the music is playing, you’ve got to get up and dance. In the pandemic-era car-buying frenzy, no business spent more time on the dance floor than the global auto industry, which had never before enjoyed so much pricing power.

In 2023 the market is set to quickly lose traction, UBS Group AG analysts predicted in an October report titled “The Band Stopped Playing.” Morgan Stanley echoed them a few weeks later: “We may be witnessing the sharpest pivot from undersupply to oversupply of light vehicles in a generation.” Five days after that, Bernstein warned of “cracks appearing in global pricing momentum” during 2022’s fourth quarter.

In no segment of the auto universe are those cracks showing more clearly than in the used-car market. Retailer CarMax Inc. limped its way through the end of the year, while its supposed disrupter, Carvana Co., scrambled to avoid insolvency. Used vehicle values in December registered the biggest tumble in the 27 years that Manheim—the largest auto-auction company in North America—has been keeping tabs. And carmakers’ captive finance companies are staring down a profit plunge.

The dimming outlook marks a dramatic U-turn for the industry. The early days of the pandemic presented the most disruptive event for automakers since World War  II forced Detroit to switch gears from making wheels to weapons. Because of constant Covid-19 outbreaks and parts shortages, production ground to a halt in early 2020 and recovered slowly, limiting vehicle supply. But demand remained strong for the ultimate social distancing device. With so few cars being manufactured, millions of consumers who might otherwise have bought fresh from the factory had no choice but to kick tires on the used lot.