Data shared by the IRS shows that total refunds were down 2.2% this year — 71,755,000 refunds...

Data shared by the IRS shows that total refunds were down 2.2% this year — 71,755,000 refunds were distributed as of March 29 this year compared to 73,396,000 at the same time last year. The average dollar amount received fell about 0.7% to $2,873.  

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Outside factors such as a record-spanning government shutdown, the polar vortex, and a hit to consumer confidence led to a slow start to used sales in 2019.

The implementation of a new tax code — and the nervous expectations of the effects it would have on the amount people would be receiving through their tax refunds — also led to dealers being more cautious about the used inventory they loaded up on at the start of the year, according to Jonathan Smoke, chief economist for Cox Automotive.

These factors led the way to a slow start in the auction lanes to the 2019 tax season.

Data shared by the IRS shows that total refunds were down 2.2% this year — 71.75 million refunds were distributed as of March 29 this year compared to 73.39 million at the same time last year. The average dollar amount received fell about 0.7% to $2,873.

Buyers with tax refund in hand are the catalysts behind the increased sales and vehicle values that auctions see during the tax season. With IRS data showing that there were fewer potential buyers, and that buyers would have less to spend, it becomes clear why this year's tax season was slow and spring bounce came late.

"[The 2019] tax season was a little like the reverse of the old adage about March's weather: It came in like a lion and went out like a lamb," said Tom Kontos, chief economist for KAR Auction Services, Inc. "In the case of tax season, it was a little slow in starting, but ended up solid. It seems like the early data had people thinking tax refunds would be greatly reduced, that has largely leveled off. All in all, the spring market is going along fairly well."

Used vehicle values at the start of a year are expected to be fairly stable, but that wasn't the case this year. This year started with seven straight weeks of year-over-year price declines, said Smoke.

Used vehicle values lost 2.5% of their values over the first seven weeks, based on Cox Automotive index data on three-year-old vehicles. In the five weeks following, used vehicles have gained 2.8%. This has resulted in used vehicle prices being 0.3% higher than they were at the beginning of the year.

Black Book data tells a similar story. Through the first quarter of 2019, wholesale vehicles depreciated 5.5% compared to 4.1% depreciation through the first quarter in 2018. Looking solely at March, when car shoppers began to collect their tax refunds, overall depreciation fell to 0.7%, according to Anil Goyal, executive vice president, operations, for Black Book.

An Auction's Experience during the Tax Season

"The tax season really just started last month for us," said Mark Baird, an auction manager at Orlando Longwood Auto Auction. "It's been different. It's been slower for us as far as consignment."

Orlando Longwood Auto Auction, an auction located in Flordia, primarily runs new-vehicle trade-ins. When local dealerships sell a vehicle, the transaction many times also includes a trade-in from the buyer. The dealers either keep the vehicles in their lot to sell, or consign them at an auction, such as Orlando Longwood Auto Auction.

The vehicles that Orlando Longwood Auto Auction typically run are 4- to 6-year-old vehicles with up to 100,000 miles on the odometer.

The spring bounce brought by tax season began at the end of March for Orlando Longwood Auto Auction.

This year, Baird said dealerships held onto more of their trade-in to sell on their lots during the first two months of the year. Consignment from their dealers has only recently begun to pick up, he said.

As of last month, pricing for the vehicles they're selling has been up. Good cars, which the auction classifies as those that fall within the $6,000 to $7,000 price range, have been selling particularly well, Baird noted.

Baird said that tax season this year wasn't too much different than last year. He described last year's tax season as "maybe a little better" but not by much.

There is a more stark difference he compares this year's tax season to the one in 2017. That tax season in 2017 not only started sooner — Baird said that it felt like it started in December 2016 at his auction — but people were buying all sorts of vehicles, from the lowest priced cars all the way up to most expensive ones.

This year, a junk car may sell for $400. Two years ago, that same car could have brought in $1,000 during tax season, Baird said.

2019 Spring Bounce Expectations

The 2019 spring bounce, when used vehicle sales increase due to tax-refund-triggered financing, started in earnest in week 10 of the year, noted Smoke. In 2018, the spring bounce started in earnest in week nine.

Vehicle values were also at a different place last year compared to this year. Last year, vehicle values had held fairly stable through the nine weeks preceding the spring bounce.

This year's bounce is not only coming a week later, but it is also starting from a lower point. Used values saw a year-over-year decline through the first seven weeks of the year, so there's a lot to make up if the industry wants to see comparable values this year, compared to last.

"We are now seeing a clear spring bounce in used values after a rough start to the year," said Smoke. "This indicates that tax-refund fueled demand is alive and well in the used car market even though the year started looking much worse."

Last year's spring bounce lasted seven weeks and produced a 2.6% increase to vehicle values during that time. This year's bounce has already produced a bigger lift, a few weeks in, but it is important to note that values started at a lower level, according to Smoke.

Most vehicle segments are seeing a benefit from the spring bounce. Pickups, vans, and SUVs/crossovers do consistently well. Sedans, however, do see a particularly good bump during this season, as their affordable prices resonate with tax refund buyers.

The only type of vehicles that are not expected to see a lift in values are luxury vehicles, as the price of these vehicles don't make them an attractive option to refund-driven buyers.

Goyal expects the spring bounce to last through April before typical seasonal depreciation patterns set in for the remainder of the year. The Black Book forecast for annual depreciation is 15% for the year.

About the author
Eric Gandarilla

Eric Gandarilla

Senior Editor

Eric Gandarilla is a former Bobit editor who worked on Automotive Fleet and Vehicle Remarketing.

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