Webb: Wholesale Values Climb Slightly over July

By Joe Overby, Staff Writer
September 08, 2008

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ATLANTA — Although Manheim's Used Vehicle Value Index improved for the third straight month, wholesale values are still soft compared to a year ago, according to the latest analysis from Tom Webb, Manheim's chief economist.

However, two segments that could be well-positioned to improve in the coming months are full-size trucks and SUVs, which gained some ground in August, he noted.

Specifically, wholesale prices in August were up 0.7 percent compared with July. Before accounting for seasonal adjustments, August prices showed a 1.4-percent uptick.

However, compared with a year ago, the index was down 3.8 percent at 110.7.

In discussing the moderate monthly upswing in full-size pickups, in particular, Webb offered what he considered to be "simplest and truest explanation."

"Economists often call auctions — especially those with equally knowledgeable players on both sides of the equation — the truest form of price discovery," he commented. "But, since bidding and selling inevitably entail individual expectations and risk assumptions, it is not abnormal for prices to swing outside of true balance."

In other words, overreactions can occur.

Considering that pickups are down 18 percent compared with August 2007 and SUV prices have fallen 23 percent, Webb indicated that it would a stretch to say that the wholesale values are strong in these segments — despite their improvements over July.

He did, however, suggest that these segments are well-positioned to make progress in the final quarter.

"Pricing in these segments has improved and, in the coming months (especially post September), these segments will be facing considerably easier year-over-year comps," he explained.

Pricing Cycle Trends

With another wholesale pricing cycle completed, Webb compared the previous long decline in wholesale values (from February 2001 to April 2003) with the softening from September 2007 to May 2008.

Declines in the earlier cycle were spurred by "an influx in supply (primarily off-lease units) and the weaker demand caused by declining employment," Webb noted.

The most recent peak-to-trough movement was "solely the result of reduced retail demand caused by tighter credit, declining consumer confidence and household budgetary pressures."

Because there was no oversupply in the latest cycle, the cumulative weakening of prices (7.8 percent) was less steep than it was in the previous cycle (12.8 percent), Webb explained.

For example, during the latest cycle, the heaviest year-over-year dip for any given month was 6.3 percent, which occurred in May 2008. But in the previous cycle, the biggest drop-off was an 11 percent softening in April 2003.

In the most recent period, Webb found that the value downturn was "consistent with industry fundamentals," even though prices in many segments overreacted thanks to a volatile market.

"Looking forward, we see retail used-vehicle sales exhibiting their traditional stability, but within an economic environment that will continue to deteriorate with respect to consumer purchasing power," he highlighted.

Opportunities in Used Market

As OEMs trim production instead of "artificially propping up" new-model sales, dealers will be well-equipped to entice buyers to buy used, Webb stated.

"The key, as always, is in acquiring inventory in the segments and price points that consumers want and lining up lending sources that will provide the credit terms buyers need," he explained. "The auction industry makes the first step easy; the second remains difficult."

Macroeconomic Issues

Moving on, Webb also touched on a few broader economic struggles facing the U.S.

Employment levels fell for the eighth straight month and year-to-date job loss now stands at 605,000. Initial jobless claims rose, while overtime hours were the lowest they've been since May 1991.

Wage and salary growth has fallen to a 3-percent annual rate and credit-card balances continue to surge, he pointed out.

One positive sign has been the more than $0.40 decrease in gas prices over the seven weeks. Webb indicated that this relief could lighten the financial burden for many households.

"We expect and hope, however, that the effect of lower gas prices will first show up in lower auto loan and credit card delinquencies, rather than new purchases," he added.

For more information, visit www.manheim.com.

Auction/Wholesale