Wholesale used vehicle prices expected to level off or decline amid strong market

The used vehicle market is strong but could be reaching a peak as used vehicle prices continued to rise in June, possibly as a result of consumer concerns over rising interest rates and the impacts of tariffs, analysts said.

In a quarterly conference call on the used vehicle market, analysts Jonathan Smoke and Zo Rahim, both of Cox Automotive, explained industry trends and recent changes. The call coincided with the monthly release of Manheim Used Vehicle Value Index, which reflects how much dealers are paying for used vehicles at the wholesale level.

In June, the index rose for the third consecutive month after strong increases in April and May, Smoke said. Used vehicle prices increased 0.53%, from May, and were up 4.3%, from June 2017, said Rahim, adding that the index of 134.9 rose to the highest level since October. Wholesale vehicle prices are expected to level off at best, Smoke said, and might decline over the next few years, but the used car market is expected to remain strong.

Used vehicle prices typically reach a peak in March or April as a result of consumers using tax refunds to purchase vehicles, Rahim said. But the peak was three weeks late this year because of the delay in tax refunds, Smoke said. Prices of used vehicles that are three years old have started to rise again after the later than usual price increase this past spring. As a result, prices of used vehicles are higher than they were at the start of the year.

“We’re seeing an abnormal summer bounce,” Smoke said. “We are not certain what’s driving the June uptick. Retail demand is stronger than expected.”

This rise could be a result of the Fed looking to increase rates two more times this year and uncertainty on tariff impacts, but it’s too soon for the surge to be considered a trend as it only reflects a two-week period, he said.

So far this year, affordability in vehicles has been driving the retail used car market, Smoke said. This has led to increased demand of cars and more affordable vehicles, compared to last year. Smoke said consumers could be looking to purchase more affordable vehicles because credit has tightened for subprime borrowers. It’s more difficult for these borrowers to receive a loan than it was a year ago.

In June, wholesale prices for compact cars that are a year old rose 5.8%, from the same month last year. The prices for SUVs, vans and pickups increased, 4.5%, 3.6% and 2.3%, respectively. Luxury vehicle prices declined 1% in June.

CARS DOMINATE MARKET
Cars still dominate the wholesale used car market, with half of the volume in June, Smoke said. SUVs comprised of 34% of the volume, and pickups and vans, 11% and 6%, respectively. By comparison, 47% of new vehicle sales are SUVs, and 32% are cars. Pickups and vans accounted for 16% and 5% of volume, respectively.

Cars are expected to continue to dominate the wholesale used car market for several years, Smoke said. In June, used vehicle sales reached a peak at an annual rate of sales of 39.4 million vehicles. The three top selling used vehicles were mid-size cars, including the 2015 Nissan Altima sedan, 2018 Kia Optima sedan and 2018 Kia Forte sedan.

In the second quarter, the number of unique rental vehicles sold at auction has risen 15.2% to 3,023. The greatest number of these vehicles sold are made by Nissan, Ford and Chevrolet. And, more of these vehicles are SUVs than any other vehicle type, and the number that are SUVs has risen from the first quarter.

The average price of rental vehicles sold at auction is down 1%, from May, but up 7%, from June 2017. The average miles of these vehicles has risen about 5% to 42,700 miles, from the same month in 2017, Rahim said.

OFF-LEASE VARIETY GROWS
The mix of vehicles coming off lease has improved, with one-third of the vehicles being crossovers, Smoke said. As the vehicles coming off lease are in higher demand, more new car dealers with used car lots are pushing sales of the vehicles on those lots instead of sending them to auction. Vehicles coming off lease that are being sold by dealers instead of going to auction are between one and two years old, which should lead to price increases for those vehicle year models.

Fewer vehicles are making their way to auction, and vehicle repossessions have remained flat as the unemployment rate remains low, he said. Cox Automotive projects wholesale volume will be flat in 2018, while supply to the market has fallen.

Vehicles that are expected to come off lease are expected to reach a peak in 2019, at 4.1 million vehicles. In 2018, 3.9 million vehicles are expected to come off lease, the same amount in 2020. In 2021, the number is expected to fall to 3.7 million vehicles.

Smoke said the duration of leases used to be two to three years, but has started to shift to three or four years. Lease payments have risen 6%, over the past year, as a result of price increases and rising interest rates. Dealers are leasing fewer cars and more SUVs and luxury vehicles, driving up the price.

In the second quarter, vehicle dealers were more positive about the existing market than last year or last quarter, but their expectations for the third quarter of 2018 are less optimistic than they were in the first quarter. Cox Automotive’s Dealer Sentiment Index for the next three months fell to 56, from 70 in the first quarter.