Tuesday, Jan. 10, 2017, 04:02 PM UPDATED 9:42 AMBy Nick Zulovich
With vehicle shopper preference for SUVs and crossovers apparently strengthening and not waning, Cox Automotive chief economist Tom Webb is confident used-car managers should find higher amounts of those units flowing through the wholesale market this year, especially as off-lease models.
It’s all part of the wholesale surge where Webb is expecting overall wholesale volume to approach 7.8 million units by the end of next year, as more than half of that figure should be off-lease vehicles.
When asked about how the off-lease lanes might shift away from being full of less-desirable compact and midsize cars, Webb replied, “I think the worst of the imbalance is actually over where the product was relatively new in some of those crossover vehicles, which have a lot of appeal.
“They were not coming back off-lease yet, but that now has occurred,” he continued during his quarterly conference call with the media and investment analysts on Monday. “We’re now where those volumes are growing. I think that will be very helpful. It’s much more balanced than it was in the past.
“Still there are a large number of compact, basic model sedans that are being leased. But you could also argue that the consumer preference shift away from those vehicles might have already played out,” Webb went on to say.
Later in the call, Webb mentioned leasing activity increased for vehicles now in high demand, models such as Ford Escape and Toyota RAV4. Auto Remarketing went back to the State of the Automotive Finance Market Report generated by Experian Automotive that contained information from the first quarter of 2014. Turns out, Experian’s report showed that 2.91 percent of all new-model leases in the quarter were Escapes; a reading second to only the mark connected with Honda Civic at 3.45 percent.
And Experian indicated 1.97 percent of all new-model leases in Q1 2014 were for the RAV4. Meanwhile, another popular compact SUV — the Honda CR-V — also was among the top 10 leased models in that quarter as that unit generated 2.69 percent of new-vehicle leasing activity during that span.
Now, some of those units are already or soon will be going over the block.
“There are going to be a large number of compact SUV and crossover type models,” Webb said. “I think we’ll be a little more aligned with customer tastes. The overall movement in leasing the past couple of years has been toward mainstream models instead of solely focused on the luxury end of the market.”
Rental-risk unit & new-model incentive analysis
Webb indicated a straight average of auction prices in December for rental risk units sold at auction topped the $17,000 mark for the first time ever and was 5 percent higher than a year ago.
However, after adjusting rental-risk prices for broad shifts in market class and mileage, Webb determined pricing for these units softened by 4.4 percent.
Webb went on to mention the average mileage of rental-risk units sold in December (38,600 miles) was similar to recent months, but 13 percent lower than a year ago. He then reiterated why the 2015 mileage readings that surpassed 50,000 were so unusual.
“That exceptionally high mileage in 2015 was driven by some industry-specific and company-specific factors, which are gone,” Webb said. “My discussions with the rental car companies is that we’re pretty comfortable with that level to maximize value.
“There is going to be a little bit more of a tendency for a wide frequency distribution within that average mileage where there might be opportune times for the rental car companies can sell a risk unit with low mileage just because it might be hot in the wholesale market at that time,” he continued. “And there are certainly cases where they might want to extend the life, which they can with relative ease.”
And with mileage levels stabilizing, Webb also pointed out that the condition of rental risk units is perhaps as good as it’s ever been. Manheim determined the volume of units going through the wholesale market in the fourth quarter of 2016 with condition grades between 4 and 5 surpassed 40 percent to the highest level going back to Q1 of 2015.
“It was feared that as the rental car companies shifted a higher share of their sales away from auctions over to direct sales to dealers and even retail consumers that the less desirable units would end up at auction,” Webb said. “Clearly that has not been the case.
“That’s because the rental car companies also have an inherent interest in protection residual values overall. The specific brands they hold in their fleet, they know the auction represents the truest form of price discovery and as we say the only venue where you can get more than you asked for,” he went on to say.
Webb closed his off-rental discussion by insisting how much new-vehicle incentives can impact risk-unit price performance.
“With respective to incentive activity, (rental-risk units) are basically 1-year-old vehicles so they’re extremely sensitive to the incentive activity that’s going on within the new-vehicle side of the market,” he said. “We’ve been relatively but not overly aggressive. I know there are some concerns that incentive levels are at record levels, maybe adjusting them for the transaction price. But my general sense of the market is that it hasn’t destroyed the overall wholesale values at the current time. There are obviously specific segments of the market like it’s certainly hurt the compacts. There is some intense pressure to move the new units that people really don’t want to buy.
“In terms of the go forward, I’m still relatively optimistic that they don’t go crazy in terms of an incentive war,” Webb went on to say. “This cycle is a little different than previous ones where you have to realize the manufacturers themselves basically are holding the residual risk on basically about 10 million lease units that they have in their portfolio. You would think they would keep that in mind when they do their vehicle push.”