Approaching Spring Used Market Lift Off

Tax refunds drive the demand that makes the spring season the most important season of the year for the used-vehicle market. This is week 9 of the year, which is when we expect to see a jump in used retail sales.

Week 9 should correspond to when about half of tax refunds have been distributed by the IRS, based on what has happened since 2017. Over the last two years, 47% and 46% of tax refunds (respectively) have been distributed by calendar week 9.

Usually, the IRS is prompt in providing data by week, but for some reason, they have not issued any filing and refund statistics since February 7 this year.

As of then, tax returns filed with the IRS were down modestly (0.4%), but the number of refunds was down 4.8%. However, the average refund was up slightly (0.2%). As of February 7, we were only about 20% through tax refund season.

When we get to 50% of filings processed, we expect that total refunds will be up over last year, along with the average refund amount. We base this expectation on growth in the labor market, growth in wages and incomes, and growth in tax withholdings.

Once we reach 50% of refunds distributed, we expect the spring used-car market to take off and last for 7 to 9 weeks. This year’s peak demand will likely last through mid-April.

We have observed that retail used-vehicle sales through week 8 this year have not yet exhibited the characteristic jump that signals the beginning of the key buying period. Week 8, which ended this past weekend, was on par with where it was at the same point last year. This year the volume trend has been flat recently when last year the market was starting to see growth, but the change last year was a result of a recovery from very weak sales to start the year.

Weather has been very different this year compared to last year. Warmer January weather this year has led to a stronger pace of sales to start 2020. As a result, we had more activity earlier, and recent weeks have been relatively slower. However, the pace is now about where it was last year as we reach the pivotal week when tax refunds should lead to increasing sales.

Wholesale used-vehicle prices did move up in week 8. After 7-straight weeks of stable prices, last week saw a slight uptick in values of 0.3% on the three-year-old Manheim Market Report (MMR) Index. Last year the uptick for tax refund season began two weeks later. With no observed increase in used retail sales activity, we suspect that the price increase was a result of dealers replenishing and adding to inventory ahead of the season. Dealers have been more optimistic this year, which is why they seem to be stocking up ahead of the expected demand.

Next week we hope that the IRS catches up with their tax filing and refund data. Regardless, we’ll be observing and reporting on what we see in retail used-vehicle sales and wholesale used-vehicle prices as spring nears.

Weekly updates are being provided through tax return season.