Used vehicle prices might rise up to 30% amid strong demand this spring

by Jeff Della Rosa ([email protected]) 9,280 views 

Wholesale used vehicle prices declined in December, but economists expect values to rise sharply this spring following the issuance of more stimulus money and tax refunds.

The wholesale prices of used vehicles on a mix, mileage and seasonally adjusted basis, fell 0.5% in December, from November, but were up 14.2% from the same month in 2019, said Zo Rahim, manager of economic and industry insights for Cox Automotive.

Rahim noted the higher prices are not historically unusual as the industry has had higher prices at auction, but the strength in pricing can be attributed to a rise in values since April.

Jonathan Smoke, chief economist for Cox Automotive, highlighted the importance of whether changes in used vehicle value trends might indicate a correction. However, Smoke said he’s seen no evidence of a correction and doesn’t expect one this year.

“Supply remains tight and demand remains strong despite some softening this fall,” Smoke said. “While January is a bit of a wild card for the economy, as we get closer to the spring, conditions look to be very favorable for used vehicle values.”

Vehicle values should follow a much more normal pattern in 2021,” he added. “But we’re starting from a high level from the step-change we experienced in 2020.”

This spring, the values are expected to rise to new highs, said Smoke, noting that a record will be set for year-over-year price changes. After May, pricing is expected to return to normal and by the end of the year will be normal, he said. The Manheim Used Vehicle Value Index could rise as much as 30% in April, but it will be up about 2% by December, he said.

In a presentation on the broader economy, Smoke said the third wave of the COVID-19 pandemic that started after Labor Day has been the worst and most widespread, and the holidays contributed to a rise in cases and record numbers of people in the hospital and deaths. The United States has more than 22.44 million COVID cases, according to Johns Hopkins University & Medicine. Globally, there are 90.47 million cases. In the United States, 374,572 people have died from COVID. Globally, 1.93 million have died from the virus.

“But there is hope on the horizon as we now have vaccines being distributed, albeit slower than hoped,” he said. “It looks as though January should see the final peak in new cases, but it will take a bit more time to see hospitalizations and deaths fall as well.”

Smoke said the virus path is more known as is the outcome of the election. Under a new administration, he expects more stimulus money will be approved in the first quarter beyond the $900 billion stimulus package approved in late December. He also expects a rise in infrastructure spending that will likely include investments in electric vehicle charging infrastructure and transportation. As a result, he said spending and economic growth is expected to be larger in 2021 than otherwise would’ve happened.

Regulation is also expected to grow this year, Smoke said. Those impacting the vehicle markets might include regulations related to the environment and consumer financial protection. The former is expected to lead to faster adoption of electric vehicles. The latter could make credit tighter and put more challenges on affordability amid rising inflation.

Smoke also highlighted a key part of Joe Biden’s administration: tax reform. This has implications on corporate taxes and taxes on consumers in the luxury vehicle segment.

“Like regulation, tax reform likely won’t spoil the party in 2021, but it will be a wild card to follow,” Smoke noted.

GDP has risen from the second quarter, but the fourth-quarter growth won’t compare to the nearly 34% rise in the third quarter. He said the economy hasn’t fully recovered and cannot until COVID is controlled. Unemployment is flat from November at 6.7%, and the economy lost 140,000 jobs in December as job growth slowed in the fall and the third wave strengthened, he said.

Consumer sentiment fell this fall but improved in the latter part of December after the stimulus was approved. Wages have risen because low-wage jobs have been disproportionately affected by the pandemic. Disposable income is expected to remain higher because of stimulus and enhanced unemployment benefits at least through March, he said.

Credit has tightened and reflected in a decrease in lending to subprime borrowers. He noted the cost of money remains low because of the Fed’s actions and policy, which he doesn’t expect to change for several years. Rates are lower for those with good credit. However, bond yields have risen, and December might have been the bottom for consumer rates. Spending on gasoline remains down because of low fuel prices but has started to recover, and crude oil prices have risen to more than $50 per barrel. He expected the energy sector will do better in 2021.

Franchise vehicle dealers are more positive on the market than a year ago while independent dealers are not. Franchise dealers had record profits in the third and fourth quarters and experienced some of their best months as a result of larger gross margins and improved efficiency.

In 2020, new vehicle sales declined by 15% to 14.5 million, according to a presentation by Charlie Chesbrough, senior economist at Cox Automotive. In 2021, new vehicle sales are expected to increase by 9% to 15.7 million.

December was a good month for sales, likely bolstered by news of the vaccines and the new stimulus package, Chesbrough said. This year, he expects additional stimulus money will lead to more sales.

Used vehicle sales fell by 8.2% to 36.7 million in 2020, from 40 million in 2019, according to a presentation by Rahim. In 2021, used vehicle sales are expected to rise by 2.9% to 39.3 million.

Michelle Krebs, executive analyst for Cox Automotive, provided several predictions for the year including that mask wearing and social distancing likely will remain in place even with a vaccine, the auto industry is expected to emerge stronger from the pandemic, and as vehicle ownership rises, ride-sharing and ride-hailing will decline.

Smoke expects vaccine distribution will start to improve and the United States will reach herd immunity in the second half of 2021. He also projected spending could rise amid the new stimulus money, and more is expected with the Democrats in control of the federal government. He also noted more than $1.3 trillion is in savings accounts that was not there before the pandemic and that tax refunds this spring could boost sales. And the only limiting factors might be supply and tight credit, he said.

In 2020, wholesale volumes fell by 1.6 million vehicles. The volumes tightened as a result of delayed repossessions and a decline in rental dispositions and dealer trades, Smoke said. In 2021, wholesale volumes are projected to rise by 900,000 vehicles as a result of a recovery in dealers’ business and a rise in repossessions.