The used-vehicle market has performed exceptionally well so far in 2018, with J.D. Power Valuation Services’ Adjusted Used Vehicle Price Index reaching 119.3 through July. That’s 4.7 percentage points above year-ago levels and 4.8 points above January’s reading.

The firm noted that used-vehicle prices began showing strength in the middle half of 2017, and the trend has continued deep into this year’s summer selling season. Most of the segment’s strength has been driven by mainstream car growth, the firm noted, with passenger cars of all sizes experiencing sizable improvements this year.

Compact car prices are up 9.1% from January’s level, followed by midsize and large car gains of 7.3% and 7%, respectively. Mainstream utility prices have also shown significant movement, although not nearly at the same level as their car counterparts. For example, year-to-date compact utility prices have increased by 2.8%, while midsize utility price growth has reached 3.1%.

And while things are primarily positive on the mainstream side of the market, the large SUV segment has registered a 2.2% decline, which can be largely explained by a 28% increase in zero to five-year-old wholesale volume. Luxury segments are also not faring so well.

“Luxury segments are not enjoying the same trend as their mainstream counterparts, due in part to higher incentive spend on the new side of the market,” the firm noted in its report. “Nearly all luxury segments have experienced declines in 2018.”

Like the segment’s mainstream counterpart, luxury large utility prices have deteriorated the most and are down 5.6% from January’s level. Luxury compact utility prices are down 2% so far this year. Other luxury segment losses haven’t been as severe, and prices for the collective are down by roughly 1% year to date, according to the firm.

“There are few drivers behind the overall strength of the used market,” the firm said. “Two primary reasons are an increased dealer focus on used-vehicle operations and vehicle affordability.

“Used vehicles continue to gain popularity with consumers and dealers alike,” the firm added. “Consumers can save money buying a well-maintained, late-model used vehicle, while dealers can capitalize on used-vehicle sales where profit margins are higher than new-vehicle sales.”

With a 4% increase in overall wholesale auction volume for units up to five years old through July, consumers and dealers alike have a slew of late-model cars, SUVs and trucks to choose from — and for up to 50% or more off their original MSRPs.

The firm noted that many of the country’s top public dealership groups are capitalizing on this dynamic, and the benefits were apparent in their latest earnings reports, the firm noted.

In their second-quarter earnings reports, Penske Automotive Group, Group 1 Automotive, and Sonic Automotive Inc. each increased used-vehicle sales by sizable amounts, up 10%, 13%, and 17%, respectively. And while Lithia Motors Inc. and Asbury Automotive Group Inc. posted smaller gains of 4.4% and 7%, respectively, they were impressive nonetheless.

“Each dealer group credited increased used-vehicle operations for the increase in profits, and they continue to state plans for even bigger investments in used operations in the future,” the first stated in its report.

“While the used market is doing well, the year’s improvement highlights the need for stakeholders to maintain diligence in their understanding of market dynamics and trends expected in the future,” the firm added. “To that end, J.D. Power Valuation Services expects used-vehicle prices for units up to eight years in age to increase 1% in 2018 relative to 2017.”

The firm said negatives associated with weaker credit conditions, modestly higher incentives and yet another increase in used-vehicle are expected to be offset by positives associated with strong employment, home prices, driving demand, and continued increases in vehicle quality. Gas prices are expected to have a relatively neutral impact.

“Both mainstream and luxury segment prices are expected to be softer for utilities as more units return to the used market,” the firm noted. “Mainstream passenger car prices should continue to firm up as supply falls, while luxury prices will soften due to the increased competitive pressure associated with luxury utilities as well as mainstream cars whose prices are lower, yet whose design and optional equipment continues to push into luxury territory.

“Overall, 2018 should see used-vehicle prices rebound back to levels recorded two years ago, placing them 5% below the record high observed in 2014.”

This story originally ran on F&I and Showroom, another Bobit Business Media publication.