Roller-Coaster Year for Used-Vehicle Values

We released December Manheim Used Vehicle Value Index (MUVVI) yesterday and closed the door on what was a truly remarkable year for used-vehicle values. As we started the year, we told you to expect a 3 percent increase in the MUVVI in 2018, and we told you to expect a roller coaster ride with weakness in Q1 and strength in Q2.

The call on the roller coaster ride was correct. In fact, the roller coaster ended up being even more extreme than we had anticipated. As December came to a close, the MUVVI was 137.6, a 4.3 percent increase from a year ago, and down from its record high of 140.9 in October. We had forecast an above average 3 percent gain for the year, so we’re taking credit today for guiding you into the right ball park and keeping you apprised of how the market changed throughout the year.

You can download all the information here: Manheim Used Vehicle Value Index

Listen to a recording of the call here: Q4 MUVVI Call Replay.

Looking Ahead: The used-vehicle market hit a post-recession record in 2018, with an estimated 39.6 million units sold. Demand for used vehicles is strong and should provide support for used-vehicle values. Barring new tariffs being implemented by the Administration, we expect used-vehicle values to see another strong year of above average growth in 2019, but not quite the year-over-year price changes we saw in 2017 and 2018. The Manheim Index is likely to end the year above 140, for about a 2.5 percent gain from December 2018.

But price movement is likely to vary throughout the year. If we see no further changes to trade and tariffs, we would expect y/y price performance to decline as the year progresses, especially as we approach the spring and summer when the 2018 abnormal price performance occurred.

Price movement will also clearly depend on what happens with trade and tariffs. We have important open questions regarding ratification of the USMCA trade deal and if a new Section 232 25 percent tariff will be implemented on all other countries. Related questions are: Will we see changes to tariffs on Chinese autos and parts and will Europe and Japan work out new deals to avoid new tariffs. The possible scenarios cover a wide range of outcomes. If we have new tariffs, we would see a repeat of the abnormal price pattern we saw in 2018. If we have tariffs eliminated, we could see price corrections and accelerated depreciation.

On the demand side, with strong employment conditions, consumer confidence should remain strong. A big negative factor would be additional increases in interest rates, but given recent trends in the financial markets and rhetoric from the Fed, rates could actually be stable or even lower. However, if long term rates soften without a change in policy from the Fed, there is also a strong possibility that credit overall will tighten making subprime tighten, which could weigh on demand for used vehicles.

We are also concerned about tax refund season, which plays a vital role in driving demand for used vehicles and is the reason for the traditional spring bounce in used-vehicle values. While the IRS now claims that tax refunds will still be paid despite the government shutdown, we suspect that there could be shutdown related delays in the processing of forms and the issuance of refunds. When tax refunds were delayed in 2017 due to new policies to combat identify fraud, the spring bounce was delayed and heavily muted as there was a big disconnect in the timing of wholesale supply and retail demand.

We are also concerned about the number and size of refunds in 2018 due to the changes in withholding tables implemented in the wake of tax reform last year. Our analysis suggests that there is potential for significant numbers of tax filers to be in a different position relative to tax refunds than they are accustomed.

Seventy-five percent of filers received a tax refund in 2018 on their 2017 taxes. The average refund was almost $2,800. The used-car market and the broader economy would be negatively impacted if even a small percentage of households are negatively surprised by getting no refund when they are used to getting one or worse owing money, when they are used to getting a refund.

We will be issuing a report with more details on our analysis of tax refund concerns, but at this point, this is a major concern for the first quarter and could have economic implications for the rest of the year. So, be sure to visit my section — Smoke on Cars — in the Cox Automotive Newsroom on Friday to learn more.