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Smoke on Cars

Notes From The Q3 2021 Manheim Used Vehicle Value Index Report


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During the Q3 2021 Manheim Used Vehicle Value Index call held earlier this month, we covered a significant amount of material. The Q&A session was robust, which we appreciate, and we ran out of time due to the volume of questions.

While reviewing the remaining questions, we noticed that most fell into four major categories: weakening sales, pricing, off-lease volumes and certified pre-owned.

After some collaboration with Kevin Chartier from Manheim Consulting, I am sharing thoughts on those big topics to better illustrate what we are seeing in the market as we enter the fourth quarter of what has been an amazing year.


What do you suspect is driving the recent weakening in used retail sales? Is it a function of overall weakening consumer spending?
Despite COVID-19, the consumer has been spending all year. Overall spending remained strong this summer but started to slow down from peaks. Outside of travel-related categories, spending in dollar terms is still up compared to 2019. And vehicle-related categories continue to be strong with pricing power also playing a role in spending being up compared to 2019.

But that consistency in spending on vehicles is very much a product of inflation, as activity measured in units (sales volume) definitely slowed as we transitioned from the spring and into the summer. As we reached the end of May, new and used vehicle sales started to lose momentum and that continued through June and into July for both new and used. June was the point in which the new-vehicle market hit a wall on supply. And June was also when price inflation started to slow the pace of sales of used vehicles as well. The trends in new and used diverged in August as worsening supply conditions led to lower new sales. September saw both new and used lose some momentum, but used is clearly performing better than new.

Used retail demand is holding up better than new, but rising prices will produce modest slowing through the end of the year. Still, we will likely end this year with more retail used vehicles sold than in 2019. Credit remains widely available, and terms are favorable. Rates remain attractive. Consumers have ample cash to handle the higher prices, so used retail should see record sales before we end the year.

Is the chip shortage still driving new car sales lower or are there other drivers?
The decline in new-vehicle sales is driven by a supply/demand imbalance caused by the chip shortage, the impact of which has become increasingly worse over time. As of early March, most vehicles affected by the shortage had ample supply. New-vehicle inventory even increased in February due to slower sales caused by winter storms. However, the start of the spring selling season – and record April sales – rapidly drew down new-vehicle inventory. By this time, consumers were well aware of the shortage and indicated in our research that they expected higher prices and fewer choices. In May, inventories reached a record low and has continued to drop every month, eventually dipping below 1 million available units in September.

However, I think we’re close to the worst point in the chip shortage debacle. When you really look at the production problems that caused us to go backwards when we thought things would improve in the third quarter, they were all about the Delta variant, notably with suppliers in southeast Asia. And now we’re starting to see cases in most developed countries declining again, so we’re not hearing reports of new disruptions. We’re very close to the end of the production challenges, but that said, it’s likely going to be the back half of next year (yes, 2022) before we see much more balance between supply and demand because we’re being told repeatedly by the manufacturers and suppliers that production will gradually improve. And we have growing pent-up demand. We’ve got delayed leases, delayed purchases and starving fleet buyers who are anxious to get orders fulfilled, so that means we really need production to be at 100% for several months before we see any real substantial change in days’ supply. In other words, the sales pace is just going to be picking up and eating the inventory for several months to come, so as a result, the supply/demand balance probably isn’t going improve until at least the end of 2022 and likely into 2023. Don’t expect normalization in supply in the vehicle market before 2024.


Do you expect used-car prices to continue to rise or stay flat until next spring?
The used-vehicle market is very sensitive to the supply problems that we’re seeing in the new market because when supply is this tight it drives demand into the used market, which creates additional supply headaches with a lower number of off-lease vehicles and lower off-fleet vehicles as well. We had balance for a few weeks this summer between buyers and sellers at auction, and during that time, we did start to see depreciation in June and July, but it didn’t last. Global production problems from the Delta variant as well as a big hurricane in the U.S. set the market further back. By the way, those things set the stage for another seller’s market, so we think we’re in for more price gains between now and the spring. This can be tricky for dealers who are dependent on auction for inventory, but auctions for most franchised dealers are about a quarter or even less of their current inventory acquisition and judging from their strong gross performance this year and profitability, I’m guessing that dealers can benefit from just a little more appreciation. We think that is what’s likely to happen between now and the spring.

Used-vehicle prices typically grow less than inflation, closer to 2% on average, but they grow as a result of the natural inflation in new-vehicle prices. Within the year, used-vehicle prices peak differently than new, typically in March and April, which are normally the busiest sales months for used vehicles as a result of tax refund season. The price performance earlier this year was fueled by frenzied demand boosted by economic recovery, tax refunds, and additional stimulus with the current price increase being fueled by lack of inventory to support demand boosted by the lack of supply in new. Used-vehicle listing prices are currently at an all-time high.

As I noted in the answer to the weakening sales question, credit remains widely available with favorable terms. In our most recent Dealertrack Credit Availability Index, we saw that access to auto credit expanded in September with access to used credit becoming 7.4% looser year over year. Consumers have ample cash to handle the higher prices, so used retail will see record sales before we end the year, even with record-high prices and the average listing price approaching $27,000.

Is there a ceiling on wholesale prices or can they go beyond new-vehicle prices? Why has there been a divergence where wholesale prices are increasing faster than retail prices? What would that mean for dealer profitability?
When we talk about wholesale prices, we are referring to the wholesale used-vehicle market, and there is no direct or easy comparison with the new-vehicle retail market but the two are definitely linked. Wholesale prices are always more dynamic as the nature of the wholesale market is a much more efficient market like the stock market. We are seeing record-setting new-vehicle prices, as above-average inflation in recent years has accelerated as a result of the supply shortage. Judging from recent trends, new vehicle price increases are still accelerating, but they are also complicated by production challenges impacting the mix of what is available to sell.

With that being said, symmetry to wholesale price changes is due to the fundamental aspect of vehicles – in normal times – being a depreciating asset. It happens every year related to tax refund season. This results in depreciation being higher in the back half of the year. Wholesale prices change because of equilibrium imbalances in the market for wholesale used vehicles. It is not merely a reflection of inventory, but rather demand on the part of buyers or sellers. The likely bet for the rest of this year is aggressive buying. Given the proximity to year-end and tax season, odds favor more price increases. We expect the Manheim Used Vehicle Value Index which set another record halfway through October, to see more gains before we end the year up 34%.

With that said, demand is staying strong. We are not seeing much change in shopping behavior on Autotrader or Kelley Blue Book and continue to see very stable performance on the credit side on Dealertrack, so as it has been, this is all about supply.

You expect wholesale prices to be down 2% next year. What do you expect for retail prices?
The Manheim Used Vehicle Value Index is likely to see more gains in the 2022 tax refund season but then transition in the back half of the year to see depreciation again. We expect to end the year with the index down slightly, only 1-2%, in December. Retail prices typically follow wholesale prices by about six weeks because many dealers price inventory based on cost. Retail prices are sticky and usually don’t fall as fast as wholesale prices. That said, we are not expecting any price corrections. To have a price correction, we need either a collapse in demand, which isn’t likely given the macro backdrop, or a surge in supply, and that’s not going to happen in new or in wholesale for several years.


When do you expect off-lease volume to make its way to the auction again at more normal volumes?
Off-lease volume has to be looked at two ways. 1) The vehicles that end up at auction, and this number is way down. 2) The vehicles that are grounded and/or bought out by the lessor. This number is more constant, as it was established 3 years ago.

We expect to see only modest gains in total wholesale volumes in 2021 and 2022, and we won’t get back to 2019 levels as off-rental, off-lease, and repo remain below 2019 levels. Then in 2023, the market will see off-lease fall by 15% (the lowest level in 22 years) as the decline in 2020 leases comes home. It should be noted that physical auctions represent a subset of the wholesale market, and auctions are not seeing volume gains in 2021 as the strong run-up in values has contributed to more wholesale commercial transactions, especially involving off-lease units, occurring in other channels. A silver lining to the challenges in commercial in 2021 has been that stronger retail sales and more off-lease arbitrage caused dealer consignments and dealer-to-dealer volumes to grow.

As to when to expect normalcy in off-lease volumes, it is likely to be 2025 or later before we start to look more like the mix of commercial vehicles we had in 2019, but even then it will likely be lighter.


Are you seeing a difference in pricing between certified pre-owned versus used?
As Kevin Chartier said in the MUVVI call earlier this month, “In today’s market, everything is selling so quickly and at such high prices, I think many dealers are selling cars before they get a chance to pull them into their shops to spend the time to recondition them up to full CPO standards. This is why we haven’t seen massive growth in CPO. But with that said, CPO has been pretty good and continues to be right up there with our historic highs that we have seen over the past few years. And as we see new-vehicle inventories drop, CPO presents a great opportunity for the dealers to have something to sell to people coming in looking for a new car.”

The next quarterly call will be held on Friday, Jan. 7, 2022, at 11 a.m. EST. If you would like to be added to the distribution list of Manheim commentary and call invitations or have a question, email us at Manheim.Data@coxautoinc.com.

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