Risk of off-lease vehicles flooding the market subsides as used vehicle values rise

The used car market looks to have avoided a tidal wave of vehicles coming off lease that could have impacted vehicle values.

A lot of the vehicles came off lease over a three to four month period in late 2016 and early 2017, said Jonathan Smoke, chief economist for Manheim and compiler of the Manheim Used Vehicle Value Index.

In a conference call Monday (July 10), Smoke and Zo Rahim, both of Cox Automotive, discussed the results of the second quarter of 2017 and the outlook of the used car industry.

In June, the Manheim Used Vehicle Value Index was 129.3, a record high for the second consecutive month. Wholesale used vehicle prices rose 2.5% in June, from the same month in 2016, according to Manheim. Wholesale prices of vans and pickups rose more than 7%, while mid-sized car prices fell 2.1%. The June index challenges the concern that used car values would decline as a result of a rising supply in vehicles coming off lease.

“Instead, strong retail demand for recent model year used vehicles is encouraging dealers to buy more vehicles from auction heading into the summer,” according to Manheim. “The increased demand is more than offsetting the higher supply.”

Smoke expects used vehicle prices will flatten out over the next few months and possibly decline slightly by the end of the year. For 2017, he projected between a 1% decline and a 1% rise in price for used vehicles, from 2016. Sales of used vehicles are expected to rise 2% in 2017, from 2016.

“Net, net it’s going to be a pretty positive year for the automotive market,” Smoke said.

The strength of May and June have offset the weakness of the earlier part of the year. Historically, prices are stronger and sales volume rises in the spring, but more vehicles were sold in May and June than expected, Smoke said. Prices are up, but the value vehicles retain as a percentage of sales price has fallen 1.5%, from 2016. Average prices of wholesale vehicles show that newer cars are worth more than older ones, Smoke said.

“Automobiles are not collector coins,” he said.

New vehicles depreciate the most when they are sold, and they depreciate the second most in the first month after the sale. After the first year, they decrease in value between 1% and 2% per month.

Smoke said if used vehicles are declining more rapidly, the values of top selling vehicles should be following the trend. But the top selling vehicles, a 2016 Ford Focus, 2014 BMW X Series and a 2014 Hyundai Sonata, all have a monthly depreciation rate of 1.1% or less. Vehicle values aren’t depreciating any more than expected.

However, the average auction price of vehicles coming off lease has declined the most, he said. The price fell 4% in June. Smoke expects the second largest rise in vehicles coming off lease to happen in 2018. Consumers have been purchasing certified pre-owned vehicles after their leases end.

Smoke sees growth in certified pre-owned and buy here, pay here sales as credit has tightened. He’s hearing from lenders about some tightening, meaning subprime borrowers are less likely to receive loans, and this might lead them to purchase from a buy here, pay here dealership. In June, certified pre-owned sales fell 0.8% after rising in May. Through June, sales are up 1.3%.

Between January and June, sales of new vehicles have fallen 2%, from the same period in 2016, according to Manheim. Dealerships have had more than 4 million vehicles in stock for the past five months.

In June, vehicle sales fell 3%, from the same month in 2016. Car sales declined 13%, while light truck sales rose 4%. SUVs (41%) have surpassed cars (38%) as the new vehicle with the most sales.