We are currently in the midst of the worst used-vehicle market in the past 25 years. Year-over-year prices declined every month in 2008; however, wholesale prices did improve the first 10 days of January. Despite this, many fleets now find that the depreciation rates established 24-36 months ago are insufficient for today's resale market. In many cases, resale values of fleet vehicles are significantly below the remaining book value. Here's a forecast for what lies ahead in the wholesale market.
By Mike Antich
We are currently in the midst of the worst used-vehicle market in the past 25 years. Year-over-year prices declined every month in 2008. "The worst price declines were in May and June when gasoline prices hit $4 per gallon, causing resale values of SUVs and full-size pickups to decline," said Tom Kontos, executive vice president of analytical services for ADESA. "The next big decline occurred in the October through November timeframe, when the wholesale market felt the full impact of the credit freeze and other macroeconomic issues."
The outlook for the wholesale market in 2009 is for a continuation of volatility in resale values. "The market is very bleak," said Gus Xamplas, vice president, remarketing for Donlen Corp. "Values are dropping quicker than our indices can track. Resale values for certain units are losing significant dollars week to week."
Ricky Beggs, managing editor for Black Book, offers a similar observation. "The activity at auctions continues to be very hesitant. The sales percentages continue to be lower than normal. Those sales that have transpired are usually lower than previously published Black Book values. The market is moving downward."
Many fleets now find that the depreciation rates they established 24-36 months ago are insufficient for today's resale market. In many cases, resale values of fleet vehicles are significantly below the remaining book value.
According to Tom Webb, chief economist for Manheim Consulting, wholesale used vehicle prices (on a mix, mileage, and seasonally adjusted basis) fell 6.3 percent in 2008, compared to the year prior.
A number of factors are causing the drop in resale values. A key factor is low consumer confidence. Historically, used-vehicle values parallel the rise and fall of consumer confidence. Last December, consumer confidence fell to a record low, which coincided with the dismal resale values in the wholesale market. "There is a growing concern that the recession is intensifying," said Webb. "Households are worried about further job losses and dealers are uncertain as to what the spring selling season might bring. As a result, consumers are hunkering down and dealers are buying at auction only to fill specific needs."
The decline in consumer confidence, along with the difficulty to finance customers below a 600 FICO score, is stifling sales.
"Dealers are not buying because consumers are not buying," said Xamplas. "There is a huge dearth of credit. In addition, there has been a curtailment in floorplan financing for independent dealers. Not only can't consumers get credit, neither can dealers."
Thousands of independents shuttered their businesses in 2008. According to CNW Research, the worst month was September, when 1,000 independents went out of business.
Traditionally, used-vehicle values rebound in the spring, triggered by income tax returns and improved weather conditions. Xamplas does not foresee resale values improving this spring due to an anticipated continuation of job losses. "Each month, the unemployment numbers are worse than the preceding month, which further depresses consumer confidence." Nor does Xamplas believe credit availability will improve in the near-term. "Getting credit flowing again will require an all-encompassing solution," said Xamplas. "It involves overall employment, interest rates, consumer confidence, and the national economy – all of these are interwoven into the availability of credit."
The credit situation was expected to improve after the federal government created the Troubled Asset Recovery Program (TARP) in fall 2008. But so far, there's been little relief. A huge new stimulus package is being readied by the incoming Obama Administration to address these deficiencies. "The forces behind the credit crunch and downward spiraling business cycle will soon face off against historic low interest rates, numerous actions to improve credit lines, and a forthcoming stimulus package that will exceed all records," said Webb. "It is hard to imagine this won't have some ameliorating impact on the recession, but the magnitude and duration of the effects are unknown. At some point, there will be additional countervailing actions to lessen the potential inflationary impacts that are building."
Scarcity of Used Vehicles in 2011-2012
The first week of January did bring some good news to the remarketing arena. Wholesale prices improved noticeably in the first 10 days of January. "This was significantly more than what historical, seasonal patterns would dictate," said Web.
Beggs, likewise, reported an uptick in auction activity in his weekly video blog – Beggs on the Market. Click on http://www.blackbookusa.com/home.aspx?m=10&i=79 for more details. "Last week's auction activity was busting at the seams with crowded dealer parking lots and crowded auction lanes with much higher sales percentages. Some vehicles were bringing values north of published book values," reported Beggs. "Even the online auctions had some very strong days last week. The question is whether this trend will continue this week, next week, and even into next month."
Kontos believes the pricing turnaround in the wholesale market may have already started. "The worst may have been over in late-October/early November, around the time of the presidential election. Auction industry average prices rose by 3.6 percent over November, and November showed a modest 1.0 percent increase over an abysmal October," said Kontos.
However, the strength (and duration) of this pricing correction is very much contingent on outside macroeconomic factors. In December, the National Bureau of Economic Research decreed the nation was in a recession the entire 2008 calendar-year. It is anticipated to be the longest recession experienced by the post-World War II U.S. economy. Some predict the widespread damage to many critical financial institutions, and the fact that we are in the worst labor market since World War II, will make an economic recovery extremely slow, even after the "official" recession ends.
Wholesale auction inventories will most likely remain at all-time highs. The fundamental problem is that used-vehicle dealers are not buying vehicles because retail buyers are skittish. "Conversion rates (units sold as a percent of units offered) at auction have improved, but inflows at auctions continue to be high, and inventories remain at high levels," said Kontos. "As these units are released into the market over the coming months, they will continue to put downward pressure on prices."
Long-term, I am very bullish on the wholesale market and predict a used-vehicle shortage in the 2011-2012 timeframe. If the new-vehicle market generates the used vehicles of tomorrow, there will be fewer used vehicles in the future. In addition, lease originations declined in 2008 and are expected to do so again in 2009, which means fewer off-lease units entering the wholesale market 36 months later.
"I agree that there will be a shortage of used vehicles several years from now," said Xamplas. "In 2011 and 2012, when we assume the economy will be on an upswing, there will be a scarcity of used vehicles."
When demand exceeds supply, resale prices will rise -- finally.
All I can say is that it can't happen fast enough.
Let me know what you think.
