The used vehicle market is being challenged by the new vehicle market as it offers strong financing incentives to prospective buyers amid the COVID-19 pandemic that’s hurting sales in both markets, an economist said.
In a recent conference call on the used market, chief economist Jonathan Smoke provided an economic overview of the pandemic and the impact on the used car market along with Zo Rahim, manager of economics and industry insights. Smoke and Rahim are both with Cox Automotive, and they also presented the Manheim Used Vehicle Value Index for March.
“A recession is unavoidable as the shutdown of activity in March will be big enough for the first quarter to be negative on real GDP growth,” Smoke said. “The second quarter will see a big decline, most likely historic. We could see recovery later in the year if the pandemic ends and consumer sentiment improves. If the impact lasts longer we likely won’t see a year-end recovery in sales. It all depends on the virus and the response to it. In the near term, the shutdowns and the related job losses are key to understanding the extent of decline.”
Almost 10 million claims for unemployment were filed in the two weeks ending March 28, Smoke said, adding that another 5 million claims are expected this week. The largest percentage of job losses so far have been in Pennsylvania, Rhode Island, Nevada, Michigan and Washington.
Consumer sentiment has fallen 28% since the end of February, he said. And the sentiment is likely to continue to fall as negative data on the economy and COVID-19 continue to be released. Smoke said sentiment will be a leading indicator of recovery in the automotive market.
New vehicle sales hit a bottom last week as they fell 67%, from the same week in 2019, and the declines were the sharpest in March, he said.
In March, total new vehicle sales fell 38%, from the same month in 2019, Rahim said. Retail sales of new vehicles were down 41% in March, leading to the lowest seasonally adjusted annual rate of sales since February 2010, he said. So far this year, overall retail sales are down 13%, from the same period in 2019.
Like new vehicle sales, used vehicle retail sales also reached a bottom last week as they were down 64%, from the same week in 2020, Smoke said. Used sales declines accelerated over the last 10 days of March as the used vehicle market was challenged by the new vehicle market with most major manufacturers offering financing incentives.
“It’s all because of the very attractive 0% APRs that are garnering interest and actually are starting to register a not insignificant part of the market in the new vehicle market,” Smoke said. “What we’re seeing is an increase in incentives that will put price pressure on the younger used vehicles, and that tends to also drive used vehicle prices lower.
“But that’s not going to last forever because when we start to see things opening back up we will very quickly in the new vehicle market shift from being oversupplied to being undersupplied because of the disruption to supply chains around the world, and I would argue, that potentially will never be as productive as the global auto market has been in recent years,” he added. This is because of the supply chain and adjustments to health to react to the possibility of future flare-ups of COVID-19 or labor being aware of an increased need for personal protection or testing. As a result, it’s unlikely that vehicle sales would reach 17 million for the foreseeable future.
Vehicle sales are expected to fall over the next few months but could recover by the end of the year as new vehicle sales drop below 12 million in 2020, from 17.3 million last year, and used vehicle sales decline to less than 30 million in 2020, from 40 million in 2019, Smoke said. If the shutdown continues, new vehicle sales could drop to below 11 million and used vehicle sales could be under 29 million for the year.
“That’s a bleak outlook compared to where we were in January,” Smoke said. “I hope we’re wrong.”
Used vehicle sales started to rise for about 10 days in March until the onset of the pandemic, Smoke said. Used vehicle sales typically rise in the spring as people receive their tax refunds.
Concerning the Manheim Used Vehicle Value Index, it’s an indicator of what used car dealers are paying for vehicles on the wholesale market, Smoke said.
Wholesale used vehicle prices on a mix, mileage and seasonally adjusted basis fell 1.1% in March, from February, Rahim said. As a result, the Manheim Used Vehicle Value Index rose 4.4% to 141.9, from the same month in 2019.
Also in the call, Benjamin Flusberg, associate vice president of M Logic, which is the Manheim suite of decision products, explained changes to the Manheim Market Report (MMR). The MMR shows wholesale vehicle values, and it typically follows average auction prices. But amid the pandemic, the gap has widened between the auction prices and the MMR prices, which haven’t fallen as significantly as auction prices. This means MMR prices are higher than auction prices, Flusberg said, adding that he expects MMR to return to normal over the next two weeks.
Vehicles retention values of those between one to three years old fell 0.2% in March, from the same month in 2019, Smoke said. As of this week, the values are down 1%.