Along with giving some hints as to where the Manheim Used Vehicle Value Index might be trending — as well as what this year’s record amount of recalls did to the remarketing of rental risk units — chief economist Tom Webb explained why new-vehicle leasing is going to have a greater impact than the market might have expected.

During his quarterly conference call this week, Webb cited J.D. Power data that showed new-vehicle leasing has increased year-over-year by at least 10 percent during the past 10 quarters — seven of which had spikes of at least 20 percent.

“I get the sense that many people don’t appreciate how leasing has continued to grow this year even though the percentage increases in new-vehicle sales are substantially less,” Webb said. “People are very focused on the so-called wave of off-lease units coming next year and in 2016.

“But I think they fail to recognize that won’t even be the crest,” he added.

Manheim’s current projection has off-lease volume approaching 3.5 million units in 2017, but Webb admitted he and the rest of the analyst team are likely to adjust that estimate.

“We’re certainly going to exceed 3.5 million units and get very close to the all-time high in terms of actual units,” Webb said.

All of this off-lease volume means a bumper crop of vehicles that can be certified. That’s great news for the CPO market, which is coming off of its best sales quarter ever.

“It certainly offers an ideal opportunity for the dealers who are still doing extremely well in the CPO market,” Webb said. “The total off-lease wholesale supply, you’re talking growth of about 20 percent this year, next year and the year following, and probably another double-digit increase in 2017, which probably will have to be revised up since lease originations are higher than I anticipated.

“It’s very broad-based. There’s a lot of mainstream models as well as luxury units, which always have a high-number of off-lease volume coming back,” he added.

General Index Moves

During each call, Webb maintains two points about the Manheim Index. He reminds industry observers that the index reflects a dollar amount and not a residual percentage and it should move on an upward drift.

Also, he doesn’t make exact predictions about where the index reading might land.

However during this week’s call, Webb did discuss the previous times index readings fell below that general upward drift trend line during the 20-year history of the index.

Webb said that the first time it happened came in July 2002, and the index reading settled below the trend line for a little more than three years with the widest point of deviation being 8.5 percent.

“This was a period characterized by heavy lease returns and tightening credit conditions,” Webb said.

The next occurrence happened in October 2007 and lasted just short of two years with the widest point of deviation being 16 percent.

“This was of course the period that included the Great Recession and the total freeze up of the credit markets,” Webb said.

Webb acknowledged September’s reading of 121.4 marked a decline of 1.1 percent compared to a year ago and created the third time the index dipped below that trend line.

So how long will this index trend last? Webb offered a bit of clarity.

“Given the coming increase in wholesale supply, most notably off-lease units, most people believe prices will remain below the trend line for a considerable period of time,” Webb said. “Given that the underlying economic and industry fundamentals are vastly different today than they were in those earlier periods, I would suggest that the deviation from the trend line may be less than in the past.

“Yes, increased wholesale supplies will cause prices to fall. But they won’t cause them to collapse,” he continued. “That would require a simultaneous deterioration in either labor markets or credit conditions, neither of which appears imminent.”

So Webb offered this hypothetical situation: This cycle producing a 5-percent dip below the trend line during the closing quarter of this year.

“That would mean the low point would be a reading of about 116 or 117, about 4 percent lower than today,” Webb said.

“But again, I don’t forecast the index,” he added.

Rental Risk Units and Recalls

Manheim indicated prices rental-risk units fell again in September.

Webb determined that after accounting for broad changes in mix and mileage, prices for rental risk units softened by 4.5 percent from a year ago. He mentioned average mileage crept back up above 40,000, and volumes sold increased.

Webb shared these trends in light of this year’s record number of recalls impacting rental-risk remarketing, a topic Auto Remarketing explained with a pair of auction executives.

“In terms of remarketing rental risk units, this year has been an unusual year with one issue being the impact of recalls,” Webb said. “In the early part of the year, you had a situation where the recalls were increasing the demand in the rental fleet for loaner vehicles. Then more recently the bigger impact has been the fact of delaying some of the remarketing of those vehicles.

“Some of the remarketing of these units has been pushed back into what is a normal seasonal downward movement in pricing. Statistically, it’s not the best time to be remarketing vehicles but that’s the way things have gone,” he added.