Used vehicle prices mark first year-over-year decline since spring 2020

Wholesale used vehicle prices declined by 0.1% in September from the same month in 2021. It was the first year-over-year price decline since May 2020. Still, the decrease is not expected to lead to a price correction amid a slow recovery in supply, according to analysts.

In a recent conference call, Chris Frey, senior manager of economic and industry insights for Cox Automotive, said the Manheim Used Vehicle Value Index declined by 3% in September from August. Since January, the index has fallen by 13.5%.

Frey said the depreciation in the used vehicle market has accelerated over the past two months, and he expects used prices to continue to fall over the next few months. But it won’t be a significant decline, with depreciation slower and lower than in the past quarter.

In research on the index, equity analyst David Kelley and equity associate Gavin Kennedy, both of Jefferies LLC, noted the first year-over-year decline since May 2020 but expect a “limited risk of a meaningful used pricing correction,” with supply not expected to recover to 2019 levels by 2025. From September to the end of the year, used prices are projected to fall by 1%.

Also in the call, Jonathan Smoke, chief economist for Cox Automotive, explained the impact of Hurricane Ian on the Florida vehicle market and that it likely will affect the overall used market in October. He said about 50,000 vehicles are expected to be replaced because of the hurricane, a fraction of the impact following Hurricane Harvey in 2017. About two-thirds of the replacements are projected to happen in October and November, and he said 80% of the vehicles would come from the used market.

“COVID is no longer front and center, and that’s a good thing,” Smoke said. “We are into the fall, schools [are] operating nationwide, and we’ve seen no evidence of a new wave caused by a new variant.”

The most recent wave reached a peak in July, and the number of COVID patients in the hospital has declined, said Smoke, noting that the human and economic impact has fallen with each wave.

While the effects of the pandemic have moderated, the economic recovery has flattened. However, Smoke said he sees no evidence of consumers decreasing their spending.

“That’s the most important data to track in terms of a recession unfolding,” he added. “A recession is when there is a broad-based decline in economic activity, and the consumer drives almost 70% of the U.S. economy.”

He said consumer spending is changing, however. Consumer spending at gas stations has declined, but it’s been redirected to other areas. Spending on vehicles has decreased this year, but he said it’s not collapsing like overall spending.

Gas prices have started to rise again recently, and along with high inflation, increasing interest rates and stock market volatility, “consumer sentiment is again on the ropes,” Smoke said. The sentiment improved over the summer, and he said high consumer sentiment correlates with vehicle buying and spending.

New sentiment data shows that it fell after the most recent Fed meeting, which was attributed to stock market declines, Smoke said. But consumer spending remains strong because “consumers are in strong financial shape,” he said.

Also, he said the unemployment rate fell to a more than 50-year low at 3.5%, which matched the February 2020 number. Job creation continued to be strong, wage growth is at a 40-year high, and 80% of households have deposits three to four times higher than before the pandemic. The number of people on traditional unemployment benefits is more than 400,000 lower than pre-pandemic levels.

But, he said the good news is expected to lead to bad news because the Fed likely will continue to raise rates “until the economy breaks, and we’re already seeing the pressure of higher interest rates in the used vehicle market.”

So far this year, retail vehicle sales have diverged in the new and used vehicle markets compared to 2019 levels. New vehicle sales were lower but have started to improve. Meanwhile, used vehicle sales rose in the spring but have declined amid rising interest rates. Smoke noted that sub-prime and lower-income consumers have been impacted most as they are the most sensitive to rising interest rates.

In September, used retail sales fell 8% from August and were down 10% from September 2021. Compared to the same month in 2019, September sales fell 18%.

Smoke said that the biggest challenge for the new vehicle market is the supply, but it’s started to improve in recent weeks. In September, new inventory was down 62% compared to September 2019. He added that limited supply in the new vehicle market creates more demand in the used vehicle market.

The used market was oversupplied for the majority of 2022. In September, used inventory was down 17% from 2019 levels. The inventory is tighter now than it has been historically.

Amid the tight supply in the new vehicle market, new vehicle sales are projected to fall by 8% to 13.7 million this year from 2021. Over the same period, used vehicle sales are projected to fall by 11% to 36.3 million. The decline can be attributed to tough comparisons from 2021 and a slow start to the year because of rising rates in the spring and summer.

“We believe this fall is essentially going to be an inventory clean-up time because all of the dealers we speak to and what our expectations are for next year that they want to reduce and have their inventory as clean and as appropriately priced as possible as we approach the end of the year,” said Smoke, adding that he expects used retail prices to fall in the fourth quarter.

Smoke said high vehicle values give consumers more options, and lenders are more willing to work with them. Smoke also noted that the 60-day delinquency rate for sub-prime buyers is the highest since 2006, but the delinquencies are not converting to defaults, which are up slightly this year. Compared to 2021, delinquencies are up 36% in August, while defaults are up 4%.

“I hear from lenders that the cure rate on repos that are in process is remarkably high because people then realize that they don’t want to lose the existing vehicle and payment that they have,” he said. “Those factors contribute to how we are not expecting repossessions to explode. We simply are expecting a slow normalization.”

Smoke doesn’t expect repossession volumes to return to 2019 levels, in part, because the share of sub-prime borrowers has declined compared to the overall pool of borrowers. He said the sub-prime and deep-sub-prime borrowers drive the repossessions.

“Having fewer of them and fewer loans on the books, means mathematically, even if we went entirely back to the 2019 default rate, we still wouldn’t produce the same number of repossessions,” Smoke said.