7 Reasons Not to Fear the Used Car Market

Whether you’re a large commercial fleet manager or a car rental consignor, you’ve been reading the headlines for the past year portending the influx of post-recession lease returns into the wholesale market. The talk, of course, is what it’ll do to used car values. “We’re getting back to the shark-infested waters again,” says a large independent rental consignor, meaning he’s expecting to take a beating at auction.

With that in mind, a fleet vehicle broker said he’s anxious to get his cars to auction as soon as he can because he thinks pricing might drop further in the coming weeks.

Here’s what is raising eyebrows: auction prices for the first half of 2013 are down about 3% from a year ago, according to Manheim and ADESA. Though the faucet on those lease returns has already started, most predict the majority of those cars will hit the market toward the end of this year and into next.

ALG has revised its forecast to include more supply and has thus revised its overall 36-month residual value projection downward by 0.8 points, compared to its previous outlook.

Midsize and compact cars experienced the largest drop in prices over last year, at 4% and 5.4% respectively, according to Manheim data. These new vehicle segments are pretty crowded right now.

But it helps to put all this in context and to understand that this is best viewed as a market correction to “normalcy.” Here’s why you shouldn’t be too worried:

• New vehicle transaction prices have been strong in 2013, and it’s based on real demand, as incentive activity has remained restrained. This will benefit the back end. “There is no indication that I see that those things are going to change,” said Tom Webb, Manheim’s chief economist, on the company’s most recent conference call.

• The pricing declines represent a better alignment of prices between the wholesale and retail market. The influx of units is not outsized relative to retail demand compared to past cycles, Webb says, but an increase from a severe drought in wholesale supply. “The decline from the all-time high in May of 2011 should not be regarded as a bad thing or an alarming thing,” Webb said.

• The certified pre-owned (CPO) market is expected to hit record sales this year. Most rental risk units and many off-lease units qualify for CPO programs, which bodes well for pricing.

• The last major spike in off-lease returns, in the middle of the last decade, was a result of overproduction and thus manufacturers looking to move metal that they couldn’t retail. Today, dealers say that the leased vehicles coming back are very much in demand. These are cars people want. Moreover, Webb predicts there will be a shorter spike in lease returns than other prognosticators, in contradiction to ALG’s upward revision.

• Financing is available, at least for now. Webb has some concerns regarding the fact that close to 50% of all used vehicle retail contracts are for more than 60 months, and longer contracts lead to more repos. Would this lead to a tightening of financing? Perhaps, but Webb doesn’t see that happening for at least a year.

• While most rental risk units are compact and midsized cars, the weakness in these segments is in the three- to four-year-old band. This may cause concern for off-lease consignors, but it shouldn’t for rental consignors, who are selling more against the new vehicle market and those higher transaction prices. Wholesale risk car pricing remains strong.

• If you’re selling pickups, you’re in good shape. The revitalization of the housing market has created demand in both new and used truck markets. While housing starts are rising, volume is nowhere near pre-recession, meaning more pent-up demand will drive further growth.

Ricky Beggs of Black Book thinks we may see a little greater depreciation than last year in the coming quarter. Beggs is watching the compact and midsized segments closely. “New models and fewer incentives (on new compacts and midsized cars) will keep wholesale prices okay, but mitigating that is the fact that so many new models are out there, which will push more trade-ins and so more volume,” he says.

Nonetheless, “There’s nothing out there that has anyone scared or shocked or surprised,” Beggs says.

It’s true; fleets could feel a squeeze with higher new vehicle transaction prices and moderating wholesale values. In a vacuum, this would drive holding costs up. At the very least, there are options within a fleet’s control to moderate that.

Originally posted on Business Fleet