NADA Used Car Guide Analyzes Wholesale and Retail Pricing Differences

Philly Murtha | Mar 07, 2016
Consumers who want to purchase a used, late-model compact or large car or a midsize van will most likely be able to get a deal closer to the wholesale price than they would have gotten seven years ago, according to research by NADA Used Car Guide®, a division of J.D. Power.

In a recent white paper, “Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices,” the NADA Used Car Guide team looked at trends related to variation between wholesale prices that dealerships pay at auction and retail price premiums and at segment differences. The team’s research also provides cues to when it’s the best time to shop for a used vehicle.

Used-Vehicle Prices Ebb and Flow with the Economy, Seasons
To better understand how the used car market has evolved over the years, consider this brief historical perspective. There was a dramatic downward shift in used-vehicle wholesale prices in 2000, in the wake of hefty new-vehicle incentives and a surplus of off-lease vehicles, according to NADA research. By 2003, wholesale prices had fallen an average of 12%, or by $3,000, from 2000 to an average of $12,000. By the mid-2000s, used-vehicle prices returned to higher levels, but wholesales dropped by 11% from 2007 to 2008—when gasoline prices soared and financial markets collapsed, bringing on the Great Recession.

Since then, used-vehicle wholesale prices began to rise due to a low supply of vehicles, easier credit, and an improved attitude among consumers and dealers about the used car market. In 2014 and 2015, the average wholesale used-vehicle price increased to an all-time high of nearly $16,000. Similarly, the prices paid by used-vehicle shoppers also rose—up 18% from 2007 to 2015.

Analyzing the spread or variation between used-vehicle wholesale and retail price averages is one way to observe trends. NADA’s Used Car Guide team looked at data from two sources, including the Power Information Network® (PIN) from J.D. Power, to determine the difference between average wholesale price (for vehicles up to 8 years old) and the retail premium during the past decade.

The spread between wholesale and retail premium was the greatest in 2008—41.3%—just before the financial crisis. Over the next five years, the range between average wholesale and retail premiums began to increase, but at a slower rate. In 2012, it was the lowest in the past decade—33.4%. By 2015, it increased by only 1.9 points to 35.3%—still 6 points below 2008.

Retail Price Premiums for Non-Premium Segments Drop Most
Research finds that some used-vehicle segments offer better prices. For instance, the average retail premium for a 3-year-old non-luxury model was 30% in calendar 2006-2007, but declined 8 points to just 22% in the 2014-2015 calendar year.

At the segment level, used-vehicle shoppers may find better deals on used compact cars since the spread between wholesale and retail premiums for compact cars, such as the Toyota Corolla or Honda Civic, declined by 11 percentage points from 2006-2007 to 2014-2015. Retail premium spread fell by 15 percentage points for used large cars (i.e., Chevrolet Impala, Ford Taurus). On the truck side, the retail premium spread also narrowed 15 points for used midsize pickups (Ford Ranger, Dodge Dakota, Toyota Tacoma) and also for used midsize vans (Dodge Caravan, Honda Odyssey)—between the two periods.

In contrast, luxury used-vehicle segments showed narrower spread differences between wholesale and retail price premiums during these two periods. Luxury midsize SUVs (Lexus RX-Series, Acura MDX) spreads eroded the least—only 1-2 percentage points, according to NADA research. Large luxury large (Lexus LS-Series, Mercedes-Benz S-Class) and luxury compact cars (BMW 3 Series, Mercedes-Benz C-Class) retail premiums were down by 4 percentage points from the 2006-2007 period.

Considering a Used Vehicle: Research on Vehicle Age and Seasonality
Although it seems counterintuitive, older vehicles may not be as inexpensive as expected, according to the white paper, because older vehicles with lower wholesale prices may have higher retail premiums as dealers will need to spend more on reconditioning these vehicles before sale. The NADA research team also notes that it’s optimal to purchase a used car in the first months of the calendar year—February through April—when average wholesale and retail price spreads are the narrowest. The average retail premium spread for used vehicles climbs every month between May and September. However, in the final three months of the year, retail premiums dip as demand for wholesale used vehicles also eases.

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