The Car and Truck Fleet and Leasing Management Magazine

The State of the Wholesale Used-Vehicle Market

High demand and scarce supply has resulted in extremely strong resale values, which are forecast to persist for the next several years.

September 2011, by The Editors of Black Book

While the rest of the economy is still floundering, remarketers have something to celebrate: 2011 has been an unbelievable sales year in the used-vehicle business.

Commercial fleet managers and their fleet management companies have been real heroes for their respective companies. Demand is extremely strong for good used vehicles as many dealers are clamoring to meet consumer demands for what they perceive as a better buy — a three- to four-year-old used vehicle.

Because of continuing limited used-vehicle supplies, resale value retention has been at tremendous levels for most of the past seven to eight months. Historically, the wholesale used-vehicle market gets a seasonal adjustment during the August to November time period, as dealers make room for an additional model-year of vehicles coming to dealer showrooms.

As the industry headed into August a trend change was observed with the easing up of  resale values on most models and segments. The key point is that this current softening is at a much smaller level than has historically been the case. The movement from higher-than-normal resale values to a seasonal adjustment, which is much more controlled, is all being driven by a lack of supply of used vehicles.

Fewer returning off-lease units, fewer rental cars being remarketed, even strategic remarketing by fleets extending vehicle lifecycles, to go along with drops of 38 percent and 30 percent in 2009 and 2010 respectively from pre-recession levels of new vehicle sales, are all driving forces behind the current tight used-vehicle inventory.

Cause of the Banner Year

The reason for 2011’s banner used-vehicle sales year is simple — demand is outstripping supply.

The beginning of the shortage of used vehicles can be pinpointed to 2009 when annual new vehicle sales fell to a low of 10.3 million units from the previous year’s mark of 16.9 million.

With every new vehicle sale there is a used vehicle being manufactured. Excluding lease contracts from retail and commercial segments, it is not known when a vehicle will be released to the used marketplace. In retail sales, dealers say that between 45 percent and 75 percent of sales have a trade-in. Using 2005 and 2009 volumes, and a rate of 60 percent, almost 4 million potential used vehicles did not come into the marketplace.
This used-vehicle model supply shortage was made even more prevalent due to large numbers of consumers who could have been new-vehicle purchasers, instead, electing to buy or finance a good used vehicle at a lesser total expenditure, e.g., a $12,000 to $14,000 used vehicle versus a $28,000 to $30,000 new vehicle.

It will probably be 2013 before new-vehicle unit volume returns to the 15-plus-million level of new vehicle sales. At an estimated 15.5 million in 2013 and the traditional 60-percent trade-in rate, there will only be 400,000 fewer trade-in units than the market had access to in 2007 when new vehicle sales were at 16.2 million. It is expected that there will be a solid level of value in the used market through the middle of 2013.

Getting back to the expected new-vehicle volumes will be a steady climb, raising the expected used-vehicle inventory at the same pace. In some quarters there is a belief that the new-vehicle market will be back to over 17-million sales in the next three to four years.

However, there is one factor missing from this rosy prediction — the lack of home equity money. When sales volumes were at 17-million units, about 1.7 million of these transactions were financed through home equity loans.

Because of the housing crash, it is likely that it will be some time before this financing source returns. Without home equity funding as a source of financing, a more realistic sales projection is 15.5 million, with estimates between 15.6 and 15.8 million for the 2014 and 2015 model-years.

Finding a Reasonable Market

The evaluation of any used vehicle is usually based on the last vehicle bought or sold at auction. For a buyer, it may have been a “steal” or “overvalued.” For a seller, that last vehicle may not have “brought enough.”

The ideal is for both parties to walk away from a deal thinking that that it was “reasonable.” The road to getting a reasonable deal both as a seller and as a buyer doesn’t have to be difficult. But it is important to know — particularly at this moment in time — what factors are driving the wholesale remarketing segment as a whole.

Impact of Regional Differences

Regional differences have gradually become a moot point as online auction and listing venues have expanded, erasing geographic distances.
Timely and versatile shipping solutions have made distance purchases very seamless. With today’s tight supplies and limited selection of units, dealers are almost forced to expand their purchasing area, especially when looking for an exceptional, extra-clean, low-mileage vehicle. From a seller’s viewpoint, the market of potential buyers has expanded as well once a vehicle is listed and offered online.

As a vehicle enters the digital wholesale marketplace, it is crucial to remember the importance of detailed and accurate inspection and condition reports, particularly for a buyer who may be located a state or two away.

Getting more eyes from a broader geographical area is a tremendous way to improve returns. Physical and online auctions do a great job with Web tools and solutions to make this a solid way to find inventory.

It is an easy process to search for vehicles, compare condition reports, and complete the bidding and purchase process. Oftentimes an online buyer’s confidence level is raised when in-lane bidding is strong. The transaction may still be from an in-lane bidder, but if the next-to-last bidder was online, he or she may be responsible for pushing the bid a little higher, thus getting an extra $100 or more for the seller.

The Effects of Mileage

Supply has an effect on all phases of the industry, and the limited availability of low- or even normal-mileage units has made some dealers more willing to purchase vehicles with high mileage. Of course, low-mileage vehicles are still in high demand.

Today’s mileage charts are reflective of past adjustment levels, except on the higher-line luxury units where the deduction is slightly more for the same age and mileage ranges. What has changed is the additional value dealers are willing to place on very low-mileage units.

The growth in the use of mobile applications to value a car has allowed more dealers to apply the mileage variances into their appraisal and valuation process, instead of just guessing. The result is more consistency in these extremely low- and far-out higher mileage transactions.


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