In what might be encouraging news for some dealers, Moody’s Analytics projected that used-vehicle prices not only will continue to soften, but the decrease will extend at least through the middle of 2014.
However, the firm doesn’t expect used-model prices to dip as low as what dealers experienced during the recession. Instead, Moody's anticipates a dip of about 3 to 4 percent from what dealers are seeing now.
Moody’s came to this projection because the firm expects the supply of used vehicles to return to normal levels before the end of 2014. Sophia Koropeckyj, managing director at Moody’s Analytics, explained how trends are showing how supply is going in that direction already as part of firm’s July Auto Navigator.
Koropeckyj first mentioned supply has improved since rising new vehicle sales have increased the inventory of used vehicles from trade-ins. She added the influx from fleets is also restoring supply since fleet sales increased by 18 percent in June, “suggesting that rental companies are retiring many vehicles.
“The number of vehicles that were previously rentals in the auction market is on the rise. As a result, according to Manheim, the average price of previously rental vehicles sold at auction fell in both May and June,” Koropeckyj added.
At the time of its report, Moody’s mentioned CNW Research’s findings that showed dealers held 46.2 days’ of used vehicles, up 2.8 percent from a year earlier. According to updated CNW data shared late last week, the supply level ticked up to 47.5 days in July, marking an 11.55 percent jump year-over-year.
After touching on some hard data, Koropeckyj turned her attention to OEM behavior as to why used-vehicle prices will soften through 2014.
“Vehicle manufacturers are expected to maintain better control over their production than they did during the first half of the 2000s. This better control will mean that they will not need to rely as much on incentives to clear out any unwanted buildup of inventory,” Koropeckyj explained.
“Prior to the recession, ever-escalating incentive spending, which reduced effective prices of new vehicles, also reduced the effective prices of used vehicles,” she continued.
Under Moody’s Analytics most likely forecast, analysts determined used-vehicle prices will bottom out 3.3 percent below the level seen during the second quarter of this year.
If the economy were to weaken and fall into a second recession, the drop from the current level of prices would be deeper, 4.3 percent, according to Moody’s.
The firm’s probability of a mild second recession is one in four.
“The underlying assumptions for such a scenario include a worsening European debt crisis and the dampening effect on the U.S. economy of uncertainties about U.S. fiscal policy,” Koropeckyj explained. “Declining business and consumer confidence, employment, and income depressed new-vehicle sales in 2012.
“Thanks in part to accommodative monetary policy, the subsiding European crisis, and some movement by Congress to address fiscal issues, the economy should begin to firm in the second half of 2013,” she continued.
Moody’s acknowledged that used-vehicle prices would fall much more under a “protracted slump scenario,” but the firm placed a low probability — only 4 percent — of such a slump occurring.
“We consider such a scenario here because of the disappointing and painfully slow improvement in the labor market, as highlighted by June’s payroll employment gains of a paltry 80,000 jobs,” Koropeckyj noted.
“A protracted slump could occur if the European situation were to deteriorate significantly and lead to a deep recession, which would inevitably spill over into the U.S. economy,” she cautioned. “The impact on U.S. banks would result in curtailed credit availability, which would reverse much of the recovery in new- and used-vehicle sales. New-vehicle sales would average below 13 million units (seasonally adjusted annualized rate) until mid-2014.”