Current Monthly Index

Wholesale Prices Rise Further in February

Wholesale used vehicle prices rose in February, even after accounting for the large normal seasonal upswing in pricing that occurs at the beginning of the year. The Manheim Used Vehicle Value Index (which is mix, mileage and seasonally adjusted) stood at 118.1 in February. That represented a 0.4% increase from January and an 11.9% increase from a year ago.

The potential wholesale supply of used vehicles remains constrained by the low level of new vehicle sales. Meanwhile, the demand for used units in the wholesale market remains strong.

New vehicle sales: continued weakness. After a poor January (retail unit volumes were below even the dismal January 2009 level), new vehicle sales remained weak in February. In fact, the seasonally adjusted annual selling rate (10.4 million) was below January’s pace (10.8 million). And, in both months, sales were boosted by higher fleet volumes. To be sure, weather has played a role in the low level of new vehicle sales so far in 2010, but the lack of consumer income and confidence has been even more significant than the record snowfalls.

A new incentive war?  More troubling for the used vehicle market will be the possible repercussions from higher incentives. Given that actual new inventory counts remain manageable, the tick-for-tack increases in incentives appear to be a direct fallout from Toyota’s recall. With the incentive of choice being 0% financing, the key will be how far down the credit scale those offers will be made available and what sort of down payment the lenders will require. Given that GM was able to achieve a $4,000 increase in average transaction price in February versus a year ago, the higher level of incentives will likely have less of an impact on used vehicle residuals than in the past.

Consumer hesitancy is based on facts, not simply fears.  It was expected that a high consumer savings rate would depress retail spending in the initial stages of this recovery. And, indeed, the savings rate is high relative to the boom years, but, in recent months, that rate has fallen. The savings rate was 3.3% in January versus 4.2% in December and 5.4% in the second quarter of 2009. Over the past year, personal income has been flat, while real consumption has risen. Thus, it is that lack of income stemming from a weak labor market that has dampened the recovery, and will continue to do so. (Our commentary and reaction to February's employment reported will be posted at www.manheimconsulting.typepad.com on Monday, March 8.)

Used vehicle retail sales: strength in an otherwise weak market.  Retail sales of used vehicles by dealers rose at a double-digit pace in January, according to CNW Marketing Research. Preliminary numbers suggest another, but more modest, gain in February. And, statistics from the seven publicly traded dealership groups show that used vehicle operations finished 2009 on a strong note. Same-store unit volumes rose at their fast pace since the third quarter of 2005, and gross margins were above their year-ago level.

Mid-priced cars show strength in February. Previous and current model year vehicles remain in exceptionally short supply at auction due to the reduction in off-rental units. As a consequence, prices for these vehicles have been strong. That, however, has been the case for more than a year - and, to a certain extent, prices for the newer model used vehicles have been bumping up against the ceiling imposed by new vehicle prices. In recent months, it has been older (especially 3 to 4 year old vehicles) and units with higher-mileage that have enjoyed the biggest price gains. This has been beneficial to those remarketing end-of-service fleet units.

Price changes by market class have evened out over the past several months. On a year-over-year basis, the van segments (from compact passenger to fullsize cargo) have shown the biggest gains. Not unrelated, these are the two segments with the biggest falloff in available supply.

Toyota: recalls and residuals.  Not unexpectedly, Toyota residuals for recalled models weakened relative to the overall market in recent weeks. The decline has not been as outsized as the publicity, but it has been significant. From an analytical standpoint it is impossible, in real time, to segment how much of the decline is specific to the recall, is related to knock-on effects, is reflective of higher incentives, is representative of self-reinforcing short-term factors, stems from uncertainty, or is symptomatic of a permanent shift. Given that some Toyota models were underperforming compared to their past history even before the recall as a result current and past lease deals, and that some guidebook pronouncements can be a self-reinforcing exercise if lenders temporarily adjust loan amounts, we expect part of the recent decline will be reversed.