Used Car Prices Take a Dive, Spelling More Worry for Anxious OEMs

Steph Willems
by Steph Willems
used car prices take a dive spelling more worry for anxious oems

At this point, only two things in our present reality bear any similarity to what took place in the Great Before: average new car transaction prices are shooting for the Van Allen Belt, and pickups sell like hotcakes. The relationship between 1 and 2 can’t be downplayed.

Everything else has been turned upside down by the coronavirus pandemic and the resulting plunge in sales spurred by both fear and state lockdown measures. Domestic market share is up, zero-interest loans are proliferating, and used vehicle prices are falling through the floor.

That latter issue could spell big losses for manufacturers whose main business is selling new vehicles.

The industry-standard measure of used vehicle prices, the Manheim Used Vehicle Value Index, fell 11.8 percent in the first half of April — a drop roughly equivalent of what we saw during the Great Recession of 2008-2009. If the index holds firm at that figure for the month, it could set a record, Bloomberg notes.

It’s a drop that caught even analysts at JPMorgan Chase & Co. off-guard.

“The real losers of the development are likely the captive-finance subsidiaries of automakers like GM and Ford, and the rental-car companies,” wrote head analyst Ryan Brinkman in a Monday investor’s note, adding that GM’s captive finance arm could lose $3 billion if used car prices sink 10 percent for the second quarter of 2020. Ford Credit could lose nearly that amount, $2.8 billion, Brinkman wrote.

The reason for the plunge is simple. Weak demand, with fewer auctions ongoing. Besides that, dealers and rental agencies are expected to fling used vehicles at those auctions once they restart in the hopes of making a quick buck. Rental agencies like Hertz have seen their shares plummet amid the viral mayhem.

All of this is the exact opposite of what we saw over the past few years, when used-car prices climbed rapidly amid a surge in well-optioned pickup and SUV sales that muscled buyers into the used field with their sky-high ATPs. Lease offers for more conventional rolling stock were often unattractive due to the expected depreciation. This generated greater demand for used vehicles, but buyers had to compete for very in-demand off-lease fare boasting greater standard safety and convenience features and a greater mix of trucks and SUVs to sedans than ever before. The Manheim index rose steeply over 2017, 2018, and 2019.

“We’re a bit in wait-and-see mode, and we think we’ll have a much clearer sense of used-car prices once shelter-in-place orders are lifted and auction activities can resume more normal levels,” Jennifer Laclair, chief financial officer at Ally Financial, told Bloomberg. The firm had forecast a 5-to-7-percent drop in used vehicle prices.

One thing automakers like Ford and GM are doing to push back against the potential losses is by helping keep existing vehicles in the hands of lessees, Laclair said. Lease extensions offered since the outset of the United States’ shelter-in-place era should help stem the flow of used vehicles into auctions a bit, but it’s not a cure-all.

J.D. Power data shows 1.8 million Americans will see their leases run out between March and July of this year. “OEMs may realize losses on off-lease vehicles” if used-vehicle prices fall, the firm wrote on March 25th.

[Image: Ford]

Join the conversation
2 of 32 comments
  • Jeff S Jeff S on Apr 22, 2020

    Cash for Clunkers has been over for more than 10 years and even then many of the vehicles were high mileage and on their last legs. Many of those vehicles had little value and because of that many owners would have held onto them anyway. Trade in value on most older cars is not much and for many it makes more sense to hold on to the old car especially if they have children that are either driving age or close to driving age. Also cars last longer and it is not unusual to get 15 or more years out of a car. Car dealers have large markups on most used vehicles much much more than you pay if you are buying from an individual. Cash for Clunkers was used as an excuse by car dealers to markup used car prices--most of the used vehicles dealers sell would not have been candidates for Cash for Clunkers.

  • Art Vandelay Art Vandelay on Apr 22, 2020

    Good to know on the lease bit...mine is up July 2nd. As I intend to buy it however, I wonder if I can leverage that in any way? I was led to believe that there wasn't any negotiation at the end of a lease if you wanted to buy but hadn't really looked into it yet.

  • BEPLA My own theory/question on the Mark VI:Had Lincoln used the longer sedan wheelbase on the coupe - by leaning the windshield back and pushing the dashboard & steering wheel rearward a bit - not built a sedan - and engineered the car for frameless side windows (those framed windows are clunky, look cheap, and add too many vertical lines in comparison to the previous Marks) - Would the VI have remained an attractive, aspirational object of desire?
  • VoGhost Another ICEbox? Pass. Where are you going to fill your oil addiction when all the gas stations disappear for lack of demand? I want a pickup that I can actually use for a few decades.
  • Art Vandelay Best? PCH from Ventura to somewhere near Lompoc. Most Famous? Route Irish
  • GT Ross The black wheel fad cannot die soon enough for me.
  • Brett Woods My 4-Runner had a manual with the 4-cylinder. It was acceptable but not really fun. I have thought before that auto with a six cylinder would have been smoother, more comfortable, and need less maintenance. Ditto my 4 banger manual Japanese pick-up. Nowhere near as nice as a GM with auto and six cylinders that I tried a bit later. Drove with a U.S. buddy who got one of the first C8s. He said he didn't even consider a manual. There was an article about how fewer than ten percent of buyers optioned a manual in the U.S. when they were available. Visited my English cousin who lived in a hilly suburb and she had a manual Range Rover and said she never even considered an automatic. That's culture for you.  Miata, Boxster, Mustang, Corvette and Camaro; I only want manual but I can see both sides of the argument for a Mustang, Camaro or Challenger. Once you get past a certain size and weight, cruising with automatic is a better dynamic. A dual clutch automatic is smoother, faster, probably more reliable, and still allows you to select and hold a gear. When you get these vehicles with a high performance envelope, dual-clutch automatic is what brings home the numbers.