Used vehicle prices to be stable in second half of 2019 barring new tariffs

by Jeff Della Rosa ([email protected]) 264 views 

Used vehicle prices rebounded in March after falling at the start of 2019, but after April, the prices are expected to remain stable throughout the remainder of the year, unless new tariffs are implemented.

Used vehicle prices rose 0.58% in March, from February, and the Manheim Used Vehicle Value Index increased 4% to 136 in March, from the same month in 2018, said Zo Rahim, manager of economics and industry insights for Cox Automotive.

Jonathan Smoke, chief economist for Cox Automotive, said prices for 2016 vehicles declined for seven consecutive weeks to start the year in a time that is typically stable for prices.

“Sinking consumer confidence, the polar vortex and the government shutdown even managed to pull down used sales in January,” Smoke said. “Nervousness about tax refund season made dealers more cautious about loading up used inventory to start the year. Plus, prices have risen so much last summer and fall that there was room for decline in early 2019.”

While prices declined, they have since started to rise, and are down 0.2% from the start of the year, Smoke said. In 2018, prices rose 2.6%. Prices typically rise in March and April as a result of people receiving tax refunds.

In a February survey, 78% of respondents said they were surprised by their tax refund, but the impact to the used vehicle market hasn’t been as bad as expected, Smoke said.

The number of tax returns processed through March 29 fell 1.4%, from the same time in 2018, Rahim said. And, the number of refunds declined by 2.2%, from the same time in 2018. Also, the average refund has declined, and about 1% of tax filers who received a refund in 2018 owe money this year, Smoke said. However, used vehicle prices have started to rise.

Smoke attributed the rise to variations in refunds for consumers, and more used vehicle buyers likely have benefited whereas consumers in high tax states have been negatively surprised by their taxes.

The annual rate of used vehicle sales declined to 39.4 million in March after peaking at 39.6 million in October, Smoke said. Used vehicle sales are flat from the same time last year. For 2019, the sales are expected to reach 39 million.

In a dealer sentiment survey, respondents expect a good spring but not as strong as 2018. Dealers are more positive about the market than they were in the fourth quarter of 2018 and are optimistic about the second quarter of 2019 after being pessimistic about how the first quarter would start. But optimism has fallen from when tax reform was being implemented.

“Key more negative differences compared to last year are dealer views of market conditions, consumer confidence and interest rates,” Smoke said. “It is also notable this year that the gap in sentiment and optimism has closed between franchises and independents. Franchises continue to be worried about the impact of higher tariffs.”

Smoke expects used vehicle prices to rise in April as consumers continue to receive tax refunds. Prices should be stable through the rest of the year, but tariffs could lead prices to rise or decline, depending on the outcome.

“If we end up with all uncertainty eliminated and lower tariffs, we could actually have prices come down,” said Smoke, noting that it’s impossible to forecast. “Tariff driven price movement aside, this should be another stronger than average year for vehicle values but regressing toward a more normal year, if indeed we start seeing stability.”

Prices in the second half of the year will likely fall in comparison to the same period in 2018, if tariffs don’t lead to price increases, Smoke said. “New tariffs will lead to stronger sales in the short term and higher prices, which will eventually lead to a cliff and a fall to lower sales.”

Repossessions are expected to rise as a result of increasing delinquency rates in the subprime sector after being flat or down for the majority of 2018, Smoke said.

Rising prices and the affordability of new vehicles has led to strength in the used vehicle market, he said. And this strength comes at a time when more nearly new vehicles are entering the market, largely as a result of vehicles coming into the market that were previously leased. The sales volume decline in the new vehicle market is an opportunity for the used car market, he said. The challenge for the used car market will be having enough inventory to meet demand.

The average used vehicle that is sold and financed is about $20,000, and the average monthly payment is about $414, which is up less than 1% from last year, Smoke said. The average monthly payment for a new vehicle has risen about 4% to $567.

“The only real challenge becomes, as interest rates are rising, when do subprime borrowers start running into the caps on interest rates that are imposed because of usury laws in certain parts of the country. Effectively, that means the credit dries up. We’re not at that point yet. We think we’re starting to flirt with it. And ironically one of the biggest surprises that I’ve had so far this year is the fact that auto loan rates have gone up instead of going down like we’ve seen in the 10-year bonds and mortgage rates.” Also, as new vehicle incentives decline, more people are pushed into the used vehicle market, and this helps to understand why new vehicle sales have fallen 4% so far this year, he said.

The average used vehicle interest rate was 10.7% in March, and it was the highest rate since 2011, said Smoke, noting that subprime borrowers aren’t expected to be limited until the rate rises another 200 basis points.

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