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Market Trends

A Perfect Storm Pummels Truck Resale Values

July 15, 2008, by Mike Antich - Also by this author

 By Mike Antich A combination of market forces have converged to create a “perfectstorm” to drive down resale values for pickup trucks by 15-25 percent. Theseconvergent forces are higher fuel prices, tighter consumer credit, and astagnant construction market. As a result, the pool of buyers (hence marketdemand) for used trucks has contracted, putting downward pressure on resaleprices. “The values of larger, less fuel-efficient vehicles, such as full-sizepickup trucks, have been declining across the board since the beginning of theyear at a rate far above their historical averages,” said Ricky Beggs, VP andmanaging editor of Black Book. Someof the hardest hit models have been ¾-ton and 1-ton pickups powered by dieselengines.

“The market decline started last September with the subprimedebacle and now it’s everything — fuel prices, high commodity prices,near-record low consumer confidence, the credit crunch — basically the overalleconomy,” said Dave Nagy, VP of asset management for Emkay. “There hasdefinitely been a market shift. What are selling now are vehicles under $8,500and small cars. Everything else is a struggle.”

In this environment, resale values for large SUVs have dropped 27-29percent compared to same time last year, primarily due to the high cost offuel. “Pickups and vans are also affected by the higher gas prices, but thelarger underlying issue for them is the housing market and lack of work forindependent contractors and small businesses,” said Bob Graham, director,vehicle remarketing for Automotive Resources International (ARI). Consumerpreferences are also changing and many consumers are purchasing crossovervehicles instead of SUVs. “Better than a third of all crossover buyers replaceda truck-based SUV in 2007,” said Art Spinella, VP of CNW Research.

Wholesale resale value for cargo vans have also declined. Inaddition to a soft economy, there is an oversupply of cargo vans in the wholesalemarket, primarily the result of short-cycling by many fleets. “Because of thehuge increase in supply in the market, we have seen demand drop off considerablyfor cargo vans,” said Darrin Aiken, assistant vice president of remarketing forWheels Inc.

Despite these dramatic declines in resale values, most fleets werethe beneficiaries of generous fleet incentive programs in effect two and threemodel-years ago, which is helping keep depreciation at reasonable levels, saidAiken.

Powerful Market Forces

In recent years, many companies have seen their overall fuelexpenses double. Especially hard hit are truck fleets as the cost of diesel hasrisen at a faster rate than unleaded gasoline. Although the price of fuel isdissuading some consumers from buying used trucks, most used fleet trucks areacquired by tradesman. The economy is having a much bigger impact on theirbuying decisions. “Fuel costs are definitely contributing to lower sales; however,the state of the overall economy, unemployment, and housing slowdowns arehaving a direct impact on new- and used-truck sales,” Paul Seger, VP of assetremarketing for GE Capital Solutions Fleet Services.

Work trucks and cargo vans have been particularly hard hit by theongoing slowdown in new-home construction, which is hurting contractors andtradesmen, who generally buy these vehicles. Many used-truck buyers in the constructionmarket are deferring purchases. “As the construction market has continued to decline,finding the right buyers for these ready-to-work vehicles has become more difficult,”said Aiken.

Another market force putting downward pressure on used truckprices is the tightening credit standards for auto loans. The bread-and-buttercustomers of out-of-service fleet vehicles are generally buyers with C and Dcredit, namely subprime buyers who buy from independent dealers. These dealersare having difficulty getting subprime customers financed. Increasingly, retailbuyers of used vehicles are not qualifying for lower-interest, short-term autoloans.

What’s Over the Horizon?

The impact of higher fuel prices on resale values has been atwo-edged sword. The resale values for more fuel-efficient models, such asfour-cylinder compact sedans and compact SUVs, have increased. “Prices for compactcars are up 12 percent,” said Nagy. Demand is especially strong for used vehiclesequipped with four-cylinder engines. Vehicles equipped with four-cylinderengines are getting a 5-10 percent premium versus same time last year, saidAiken. Another reason for the premium prices is that there is limited supply offour-cylinder models. “We just aren’t seeing a lot of these vehicles in the wholesalemarket right now,” said Aiken.

Likewise, hybrid vehicles are doing extremely well in the resalemarket. “Hybrid vehicles are one of the few bright spots in the market. Theirpremium over similar gasoline-only versions has increased dramatically in recentwholesale transactions,” said Beggs.

What is the forecast for truck and SUV resale values for thebalance of the year? “Personally, I think the market has overreacted to thelarge SUV, and in some respects, to the large pickup. I think you will see somelift in value on those units in the fall, probably in the neighborhood of 5-10percent. I think heavy discounting on new SUVs and pickups by the manufacturerwill effect this market at least for the balance of the year and maybe beyond,depending on future oil prices,” said Nagy.

However, other remarketers are not upbeat about the near-termprospects for an upturn in resale values. “My forecast is that the market forboth pickups and SUVs will stay depressed,” said Graham. “I would cautionsellers to be prepared for it to get even worse later in the year.” Aiken sharesa similar assessment. “I think the fall market will collapse fairly quickly.”

Seger describes his outlook on the resale market as extremelyconservative. “Buyer demand is still down. Until fuel costs remain consistentfor a period of time and the overall uncertainty in buyers-minds is removed,this segment of assets (trucks and SUVs) will continue to be depressed andchallenging to remarket,” said Seger.

One possible silver lining for the future is that the current decreasedvolume of new-truck sales may result in a shortage of used trucks two or threeyears from now, said Aiken. “When there is a decrease in supply in thewholesale market, resale prices increase. We saw that in the early 1990s. Wecould see it again.”

Let me know what you think.

[email protected]

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Mike Antich

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Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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