Used vehicle values, sales moderate after ‘frenzied buying’

An economist said the used vehicle market might have reached the end of the recent buying frenzy as prices appreciated to record levels. Used vehicle prices started to fall in June, from May, but remained up double-digits from June 2020.

In a recent conference call, Jonathan Smoke, chief economist for Cox Automotive, provided an update on the used vehicle market. The call included a discussion of the Manheim Used Vehicle Value Index, which measures what dealers pay for used vehicles on the wholesale market.

“The second quarter was certainly one for the vehicle market record books, but we’re already transitioning to yet another chapter in this saga — what we can tentatively call a post-peak demand period,” Smoke said. “Consumers have been spending on vehicles before this spring, but this spring definitely elevated that and represented a peak level of frenzied buying of vehicles.”

The peak spanned late March to late May, and by the end of May, vehicle sales moderated. Smoke said the leveling continued through June, with new vehicle sales down slightly compared to the same month in 2019. Used vehicle sales were flat compared to June 2019.

Kayla Reynolds, industry intelligence analyst for Cox Automotive, said wholesale used vehicle prices declined by 1.3% in June from May. The Manheim index fell to 200.4 but was up 34.3% from June 2020. It was the first month-over-month decrease in the index since December 2020.

Reynolds said the decline could be attributed to the market slowing from the high prices in the spring. New vehicle prices reached a record high in June. Used vehicle prices typically reach a peak in March and April amid tax refund season. The spring rise can be attributed to solid vehicle demand resulting from tax refunds, stimulus money, and economic recovery.

Smoke expects a moderating sales pace in the second half of the year. For 2021, he expects new vehicle sales of 16.5 million and used retail sales of 21.5 million.

“The new market will likely struggle the most this summer until supply chain issues diminish and inventory levels start to improve,” Smoke said. “Used retail always slows in the back half of the year, and this year is no exception. But we are not expecting a big drop.”

He added that sales results should be similar to 2019 levels, a record year for used retail sales. Wholesale volumes reached a peak in 2019, but the industry won’t return to those levels as off-lease, off-rental and repossessions remain below 2019 levels, he noted.

“May likely represented the new last record on the Manheim index that we will see for quite a while,” Smoke said. “As new vehicle production improves by the last quarter of the year, conditions will start to improve.”

He expects higher than usual price depreciation in used vehicles over the next several months. However, used prices are expected to end the year higher than at the end of 2020. Vehicle demand is expected to remain elevated as the economy remains strong. Wholesale supply is expected to remain tight through at least 2023, he said.

While a significant price correction in used vehicles is not projected, Smoke expects a return to vehicles being a depreciable asset and a more normal year for vehicle values in 2022.

Kevin Chartier, vice president of Manheim Consulting, said the price appreciation of three-year-old vehicles reached a peak in mid-June after a record 21 consecutive weeks of rising values. Typically, the height is in late March.

Chartier said the value of vehicles three years old and newer were up about $5,000 compared to January. He expects a more normal seasonal depreciation of cars following the spring spike.

Vehicle repossessions have risen slightly but remain lower than normal levels, he said. Repossessions fell 13% in June from the same month in 2020 and were down 29% from June 2019. The stimulus money has allowed owners to remain current on their monthly payments. The forbearance programs have helped as well.

He also noted that the low vehicle rental car inventory should not significantly correct used vehicle prices. Reynolds said the costs of rental vehicles sold at auction rose 2% in June from May. The prices were up 14% in June, from the same month in 2020.

Overall, vehicle inventories remain down, but Smoke said the supply looks to have reached a low point. In June, inventories were down 65% in the same month in 2019, he said. Recently, the supply of vehicles has risen slightly.

Joe Kichler, vice president of Manheim Logistics, said its brokerage business transported about 2 million vehicles in 2020, down from about 2.5 million in 2019. The company also operates a load board platform to match shippers and carriers with capacity. In 2020, the web-based platform helped to move about 8 million vehicles between dealerships and auto auctions. Overall, Manheim Logistics helped transport about 10 million cars, with the majority of them used vehicles.

Kichler noted that since the start of the COVID-19 pandemic, its capacity has declined while driver wages and fuel prices have risen. This has led the shipment miles to nearly double while the loads have fewer vehicles. Also, shippers are purchasing more vehicles from other dealerships instead of more significant buys from auto auctions.