Spring Bounce in Used Car Demand and Values Ignores Lower Tax Refunds

We now know from the IRS statistics that tax refunds have indeed been lower this year as we had feared would be the case. Total refunds are down 1.5% in number and down 2.6% in dollar amount through April 5. The decline amounts to $6 billion less being pumped into consumers’ pockets. The average refund is now down by 1.1% year-over-year.

However, we have also seen a clear spring bounce in used car values after a rough start to the year. This indicates that tax-refund fueled demand is alive and well in the used car market even though the year started looking much worse.

We had seven-straight weeks of price declines to start the year, which is typically a stable time for values. Sinking consumer confidence, the polar vortex, and the government shutdown contributed to slower used sales. Nervousness about tax refund season made dealers more cautious about loading up on used inventory to start the year.

Market Seeing Strong Spring Bounce
The spring bounce started in earnest in week 10. Using an index based on three-year-old vehicles, we can see that used vehicles lost 2.4% of value over the first 7 weeks but have since gained 2.9% in aggregate over 6 weeks, leaving us with prices 0.5% higher than at the beginning of the year.

By comparison, last year’s bounce started in week 9 and from a level place with beginning of the year. Last year’s bounce lasted 7 weeks. By week 6, last year’s bounce produced 2.4% and was losing momentum. Total 2018 bounce was 2.6%.

This year’s bounce is stronger, but it started from a lower level. The pattern has varied by type of vehicle. When we look just at nonluxury vehicles, the spring bounce is more pronounced. The Manheim index on three-year-old non-luxury vehicles indicates those vehicles are now worth 3.1% more than they were worth at the beginning of the year.

Affordability Affecting Used-Vehicle Market
Like last year, affordability is playing a role in the market. And the big spring bounce this year is likely directly related to buyers of non-luxury vehicles more likely to be positively surprised by tax refunds this year. This is consistent with what Tax Max has seen this year. Tax Max is a tax preparation service that offers car dealerships a tax season solution by filing the customer’s tax return and using the tax refund as a down payment.

The data suggests that Tax Max’s clients are more likely to get bigger refunds. For the tax filings they have processed through April 5, Tax Max’s average refund is higher than the average refund reported by the IRS through the same period and is tracking 9.5% higher than last year’s average through the same time frame. Tax Max clients are far more likely to be eligible for tax credits while also more likely to live in lower tax markets including states with no income taxes like Florida and Texas.

Higher-Than-Average Refunds Fueling Activity and Prices
Therefore, we are concluding that consumers who drive the spring used car market appear to be getting good refunds. The traditional spring bounce in activity and used car prices is happening. Non-luxury vehicles are seeing the biggest price gains and are now higher in price than the beginning of the year. We likely have only 1 to 2 more weeks of peak used market activity before the bounce ends, which also happens to be when the bulk of tax refunds will have been issued.