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.
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