Tax Refund Season Is Affecting Used Car Prices | vAuto

Now that spring has officially sprung, we’re all eager to know what will happen with used car price trends. Will we finally start to see used car prices rising? Or will we continue to see them fall? Of course, the retail market is kind of like the weather itself, with lots of ups and downs in terms of used car prices. And before we can take a look at tax season car prices specifically, we first need to consider the market conditions from the beginning of the year.

Used Car Market in Early 2023

The market started the year really strong — February’s total used vehicle sales were estimated to be up 3% from last February. Dealers were thrilled, but the success was a bit of a head-scratcher for us. Experts had predicted a much less glowing January and February due to the interest rate hikes and economic uncertainty.

So, why did used vehicle sales creep upward in early 2023? There are several likely explanations:

• Consumers received and spent their tax refunds earlier than usual
• Higher prices of new vehicles
• Lower prices of used vehicles

We know the Internal Revenue Service processed more tax refunds earlier this year than last year, and consumers seem to be spending their extra money on cars. And maybe because refund checks are lower this year and we saw downward used vehicle price trends in the first several weeks of the year, those consumers mostly bought used rather than new cars.

Used Car Prices Rising — For Now

The strong market has led used vehicles to appreciate in value. This appreciation, combined with rise in demand and consistently tight supply, began to drive up the price of used cars by mid-February. So savvy consumers looking for low tax season car prices in early March were probably disappointed. And pretty soon, the remaining tax refunds will be issued and this influx of money in consumers’ wallets will be spent or otherwise allocated. So, what will happen to used car price trends then?

Used Car Prices Dropping Soon

Once tax season ends, so, too, will the rise in used car prices. In fact, Cox Automotive Executive Vice President and vAuto Founder Dale Pollak predicts that by mid-April or early May, we’ll see used car prices dropping again. That’s not just because this year’s tax refunds will have been issued, but also because interest rates went up in late March and many expect them to go up again in mid-April. In addition, rebates on new vehicles are already growing and attracting consumers’ attention. All told, J.P. Morgan Research expects to see used car prices dropping by about 10% by the end of the year. So after tax season, car prices are likely to be lower. 

And we all know that when retail used car prices are declining and wholesale values remain relatively high due to limited supply, your margins will suffer. As 2023 progresses, it’ll be even more important to use the Variable Management approach to be sure you’re realizing the full profit potential of every vehicle in your inventory.

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