Vehicle Supply

If you listen to lyrics from a rock and roll classic performed by The Who and other bands, you might agree there is “no cure for the summertime blues.” But the auction industry had no such blues in 2018.

Jonathan Smoke, chief economist for Manheim’s parent company, Cox Automotive, said during the Manheim Used Vehicle Value Index fourth-quarter call on Jan. 8 that 2018 featured an abnormal summer of price appreciation for wholesale vehicles.

Eleven weeks of appreciation in the summer brought prices to a new equilibrium, reflecting an average 2-percent increase in value.

Smoke showed a chart displaying the Manheim Market Report Index by week for 3-year-old vehicle models. The chart showed lines representing different colors for the years 2014 through 2018. Most of the previous years showed summer price declines. But 2018, represented in the chart with a purple line, showed a rockin’ period of summer price appreciation.

“Focus on the purple line, and see just how incredible this summer was,” Smoke said.

He started out his presentation by noting that “2018 was truly a remarkable year for used-vehicle values.”

Cox Automotive told industry members at the beginning of 2018 to expect a 3-percent increase in the Manheim Used Vehicle Value Index for that year, and the company predicted a roller coaster ride with weakness in the first quarter and strength in the second. Manheim was correct about the roller-coaster ride, Smoke said, adding that it was even more extreme than expected. 

He noted that 2018 started with the market correcting from the 2017 hurricane runup. Then a strong spring market resulted in April and May price gains. But Manheim did not expect the abnormal summer appreciation that started in June and pushed the Manheim index to new records in July, August, September and October.

“After normalizing depreciation began to kick in during the fourth quarter, we ended the year with even better price performance than we forecasted,” Smoke said.

The rockin’ summer: 11 straight weeks

To get to the heart of the summer bounce, Smoke said, focus on the depreciation pattern and 3-year-old vehicles. The spring bounce was similar to one that occurred in 2015, but the 2018 bounce was delayed for about three weeks, which Smoke said was “exactly in alignment” with a delay in tax refunds.

The spring bounce lasted four weeks, but then depreciation kicked in as the spring market faded. The 11 straight weeks of summer price appreciation in 2018 took place at a time when used-vehicle prices would normally depreciate.

“Even with the higher depreciation in the fourth quarter, the strong summer trend leaves us with used-car prices on average up by 2 percent over where they would have been had we not had that summer appreciation run,” Smoke said.

All major segments saw gains during the 11-week appreciation trend, but the most pronounced appreciation was for the most affordable vehicles, specifically compacts and midsize cars, Smoke said.

The price gains were more pronounced when looking only at non-luxury 3-year-old vehicles. “There is no question that affordability has played a major driving role in the 2018 retail used market.”

Segments: Premium midsize cars are month’s top performer

Manheim’s quarterly presentation focused on more than just the cure for the summertime blues. Zo Rahim, Cox Automotive’s manager of economic and industry insights, talked about the best and worst performing segments for this past December.

Premium luxury car prices showed the steepest decline in December, with prices falling 5 percent year over year. The 2016 Mercedes-Benz C-class was the best-selling premium luxury car. Luxury midsize car prices declined 4.3 percent in December, with the 2015 Infiniti q50 all-wheel-drive reigning as the top-selling luxury mid-size car.

Rahim noted that premium sports car prices fell 2.3 percent, with the 2015 Maserati Quatroporte all-wheel-drive V-6 showing as the top-selling car in that category.

“On the other hand, the best-performing segment in December was the premium midsize car segment, which was up 7.4 percent year-over-year,” Rahim said, adding that the 2015 Nissan Altima four-cylinder was the highest-selling premium mid-size car.

Premium compact car sales were up 7.3 percent, with the 2016 Ford Fusion appearing as highest-selling car in that category. Compact pickups were up 6.6 percent, and the 2018 Nissan Frontier four-wheel-drive V-6 was the highest-selling vehicle in that category.

Smoke displayed a chart showing that the SUV has surpassed the car as the dominant new vehicle sold.

However, the used-vehicle market cannot adjust this quickly, he said.  Cars still dominate at Manheim, and that will likely be the case for a few more years.

“The changes in price performance, most notably an improvement in compact cars that has been in play all year, is a response to strengthening demand and reduced supply in the new-vehicle market,” Smoke said.  

Summer and tariffs

Smoke provided a recap of fourth quarter 2018 Cox Automotive dealer sentiment findings, noting that they “raised some warning flags” about the beginning of 2019. Dealers’ views of the overall market declined in the fourth quarter, driven by declines for franchises and independents. A drop in the independents’ sentiment index indicates that more independents than not describe the current market as weak.

“We also saw declining and differing views of the used market, as independents turned negative in Q4, while franchises continue to describe the used market as strong, but not as strong as it was last quarter,” Smoke said. “Franchises also again describe the used market as stronger than the new-vehicle market. The most startling change in the fourth quarter was that collectively dealers turned more negative about the future.

“Like with their view of the current market, independents saw a big decline in optimism, and now the pessimistic views outweigh the optimistic.”

Franchises remain optimistic, he added, but their level of optimism also declined substantially, with reasons including declining traffic, higher interest rates and rising costs. Franchises also remain concerned about tariffs and the likely impact of tariffs leading to higher prices.

Smoke expanded on the unusual price performance of summer 2018, stating that he continues to believe that the implementation and threat of more tariffs was the primary catalyst.

“However, the strong summer run, followed by weaker but not fully corrected prices in the weak sense, suggest that actual tariffs and fear of more tariffs created two different forces that combined to push prices higher during the summer but left us with prices only up about 2 percent after the market normalized,” he said.

Summer-implemented tariffs on steel and aluminum and on auto parts imported from China collectively increased the cost of a new vehicle by an approximate average of 2 percent, he added.

A Cox summer survey showed that consumers were following the news on tariffs, and that recent purchasers were influenced by the news on tariffs.

Tax refunds are also a factor for the auto industry. Because of 2018 tax reform measures, “significant numbers” of tax filers could be in a different tax refund position than they are accustomed, Smoke said.

“The used-car market and the broader economy would be negatively impacted if even a small percentage of households are negatively surprised by getting no refund when they are used to getting one, or worse, owing money when they are used to getting a refund,” Smoke said.

But the fundamentals of the market could continue to rock and roll. Smoke noted that that used-vehicle demand is at a peak, and wholesale supply is now post-peak and starting a gradual decline.

“At the segment level, compacts and midsize cars are likely to continue to perform well and outperform the rest of the market,” he said. “The used market is the answer for the affordability challenges in the new market.”

More than a year later, Hurricane Harvey still is influencing how wholesale prices and used-vehicle sales are analyzed. The record-setting storm that blasted Texas created comparisons that might make metrics appear odd.

According to ADESA Analytical Services’ monthly analysis of wholesale used-vehicle prices by vehicle model class, wholesale used-vehicle prices in September averaged $10,981 — down 0.6 percent compared to August and 0.6 percent lower than September of last year.

KAR Auction Services chief economist Tom Kontos explained prices for the truck model class segments, on average, fell at a similar rate as car prices, supporting his theory that the two groups will tend to move in parity as truck supply outpaces car supply.

In his latest edition of the Kontos Kommentary, he explained how he and the company analyst team are entering the timeframe when Harvey-influenced figures will be involved, especially with their year-over-year examinations.

“As the wholesale used-vehicle market enters the period of time comparable with last year’s hurricane season, wholesale prices will be challenged to meet last year’s high, demand-driven levels,” Kontos said.

“This is reflected in average wholesale prices in September, which fell on both a month-over-month and year-over-year basis, and significantly lower retail used-vehicle sales than last year,” he continued.

“Prices for off-lease units remained strong, however, as upstream remarketing continues to deny volume from physical auctions and causes dealers unable or unwilling to participate in online-only auctions to bid aggressively on the remaining downstream units,” Kontos went on to say, elaborating further in this online video.

A regular part of Kontos’ updates also includes analysis of fleet/lease sales of 3-year-old units with mileage between 36,000 and 45,000 miles. When holding constant for sale type, model-year age, mileage, and model class segment, Kontos discovered prices were up significantly on a year-over-year basis for both midsize cars and midsize SUV/CUVs.

Prices for those midsize cars rose 6.0 percent or $699 to $12,298, while prices for those midsize SUV/CUVs climbed 4.6 percent or $901 to $20,634.

“Midsize car prices continue to outperform prices for midsize SUVs and crossovers, due, as mentioned above, to the incoming supply of trucks outpacing that of cars,” Kontos said.

“The strength of prices for both groups in this analysis indicates, again as mentioned above, that upstream sales are preventing an oversupply of off-lease units from reaching physical auction lots,” he added.

Looking at the September data for the entire market, Kontos shared that average wholesale prices for used vehicles remarketed by manufacturers softened 1.9 percent month-over-month but ticked up 0.7 percent year-over-year.

Kontos noted prices for fleet/lease consignors dipped 1.3 percent sequentially but rose 6.6 percent annually.

Furthermore, he added average prices in September for dealer consignors ticked 0.4 percent lower versus August and 0.3 percent relative to the same month last year.

Kontos closed his latest update by reviewing September sales information he received from the National Automobile Dealers Association and Autodata Corp.

Based on NADA data, Kontos said retail used-vehicle sales by franchised dealers slid 6.3 percent year-over-year in September, and deliveries dropped 8.7 percent for independent dealers. 

Kontos also pointed out that September certified pre-owned sales declined 8.9 percent compared to the prior month and 3.9 percent year-over-year, according to figures from Autodata.  On a year-to-date basis, he added CPO sales remain up 1.8 percent versus last year.

Source: ADESA Analytical Services. August data revised.

RVI Group elevated one of its experts this week to lead its passenger vehicle insurance and analytics businesses.

Now under the leadership of Wei Fan, the firm announced its passenger vehicle insurance and quantitative analysis teams — which partner closely on business development and operations of RVI Analytics — are being consolidated. The company explained this move will allow RVI to capitalize on the analytics business including its Used Vehicle Price Index (UVPI) data subscription products.

RVI Analytics was launched earlier this year in partnership with Maryann Keller & Advisors (MK&A) — also a member of the Automotive Intelligence Council. The company is looking to offer comprehensive industry analytics for firms with automotive-related interests.

Management went on to state this operational consolidation will create efficiencies and improve RVI Analytics' ability to provide industry leading services to its clients, especially the accurate assessment of risk in used-vehicle prices, providing critical input to capital markets, lenders and lessors.

“Bringing these teams together will allow us to be more agile, better serve our customers and improve our execution through increased collaboration,” said Michael McGroarty, co-chief operating officer of RVI Group.

“We are presenting more comprehensive used-vehicle price index data than anyone else in the industry, and I am confident that this streamlined structure will position us for optimal performance going forward,” McGroarty continued.

Prior to joining RVI, Fan was the director of Used Vehicle Market Solutions for J.D. Power & Associates. Since 2007, Fan has had extensive experience with RVI’s passenger vehicle insurance and analytics business as the head of the quantitative analysis team.

“With an excellent track record at RVI, Wei is uniquely qualified to lead the passenger vehicle and analytics businesses at RVI. I look forward to their success,” said Douglas May, chief executive officer of RVI Group, which is among the companies set to be a part of Used Car Week 2018 — Education, Celebrations, Technology and Connections.

Discussions about wholesale pricing and elements through the remarketing chain are on tap for Used Car Week, which begins Nov. 12 at the Westin Keirland Resort and Spa in Scottsdale, Ariz.

Early bird discounts are available through Oct. 16. Complete details can be found at www.usedcarweek.biz.

Along with sharing its latest update on the specialty markets, Black Book reported that wholesale prices remained steady and volume a bit constricted as the calendar flipped to September.

The latest Market Insights report highlighted the strength mainstream sedans have had in the market. Coupled with the effects of increased SUV inventory over the last few years, editors acknowledged possible swinging of the pendulum for cars.

“Used sedans are hot in the market as value-conscious consumers look for affordable transportation,” said Anil Goyal, executive vice president of operations at Black Book.

Volume-weighted, editors found overall car segment values increased just a little last week — 0.03 percent. In comparison, Black Book reported market values for cars had decreased by 0.15 percent on average during the prior four-week period.

As Goyal referenced, the midsize car segment experienced the biggest increase, rising 0.24 percent or $21.

Volume-weighted, editors determined overall truck segment values (including pickups, SUVs and vans) softened by 0.11 percent last week. In comparison, the market values had decreased by 0.14 percent on average during the previous four-week period.

Within trucks, Black Book noticed the compact luxury crossover/SUV segment performed the worst, sliding by 0.36 percent or $70.

Among the anecdotes collected by Black Book representatives stationed at sales nationwide, the talk was as much about volume as price, especially in the Southeast.

— From Georgia: “The volume is still down, but the prices are not. Buyers are not thrilled about the extra bidding it takes to secure inventory for their lots.”

— From Florida: “Fewer no-sales today, and about the only vehicles not selling were the large commercial vans.”

— For North Carolina: “An auction GM in North Carolina says that they are consistently selling around 65 percent and believes the high conversions will continue until more supply comes to the physical auctions.”

And talk about volume percolated in the North, too, with the story in Pennsylvania being, “One thing that stood out today was the dealers’ acceptance to higher mileage vehicles which points to the lower supply.”

Finally, a familiar scene unfolded in Massachusetts where Black Book lane watcher said, “The nicer vehicles still bring really strong money but the older, condition challenged ones are a tough sell.”

Update on the specialty markets

As they share regularly, editors also opened a new month by recapping their latest observations of what’s happening in the specialty space.

— Collectibles: With a cumulative total of nearly $370 million, “it’s safe to say that Monterey 2018 was a success,” Black Book said.

— Recreational Vehicles: Editors indicated the average selling price of towables at auction last month crept up about 1.5 percent, reaching another all-time high at just above $15,000.

— Powersports: Black Book determined all segments are down this month in the powersports market. “Most of these are normal seasonal drops, but a few normally strong fall vehicle segments are also down a bit more than is typical for the time of year,” editors said.

— Heavy-Duty: Black Book pointed out that new heavy-duty truck orders are being delivered although the turn-in units are not showing up at auction at the same rate.

— Medium-Duty: Editors closed by noting the used market remains strong despite new inventory adding some downward pressure to wholesale prices.

If you think the East Coast is hot right now, look at what’s happening in the used-car market. Especially in terms of prices.

One particular index measuring used-car prices is poised to reach its highest level in almost three years, the annual retail sales rate is approaching 40 million and dealers are showing optimism.

Granted, there could be some concern, specifically around supply.

Starting on the retail side, used-car sales this month are likely to remain steady with July’s figures, with the seasonally adjusted annualized rate actually seeing a nice bump.

That’s according to projections released Wednesday by Edmunds, which said the used-car retail market should once again reach 3.4 million sales for the month. The August used-car SAAR would then be 39.7 million, up from 39.5 million in July.

Following a consignor and wholesale event last week, Cox Automotive senior economist Charlie Chesbrough had this to say about the used-car market: “After talking to dealers at the 2018 IARA Summer Roundtable, it’s clear that the used-vehicle business is good right now.

“The market is looking strong for 2018, with dealers still optimistic for 2019 as well,” he said in emailed comments provided to Auto Remarketing.

“However, with concerns that affordability is changing, headwinds may be in sight down the road in 2019,” Chesbrough said. “Anticipation around tariff proposals and their impact on new and used vehicles have also resulted in some pull-ahead activity, as dealers try to position themselves for the future of the used-vehicle market.”

On the pricing side, August could end being the strongest month in three years for the Seasonally Adjusted Used Vehicle Price Index from J.D. Power Valuation Services.

In a blog post earlier this week, senior automotive analyst David Paris said August used-car prices have shown sequential gains through the first three weeks of the month. What’s more, they’re likely to be higher than first projected by month’s end.

Specifically, the current J.D. Power reading of 122.0 is 2.3 points higher than July’s, Paris said.

If this trend holds, August would represent the index’s highest mark since late 2015 and be the third straight monthly gain.

“The used-vehicle market really started showing its strength in the middle half of 2017, and there are no signs of it letting up. Most of the market’s lift in prices has been driven primarily by mainstream car growth, however, mainstream utility segments continue to show firmness as well,” Paris writes in the post.

“However, luxury car and SUV segments are not experiencing the same long-running positive trend as their mainstream counterparts due in part to higher incentive spend on the new side of the market,” he said.

“There are two primary factors behind why the used market continues to heat up: first dealers are placing more emphasis on used-vehicle operations, and second, vehicle affordability is becoming increasingly important to consumers.”

That’s not to say there are not some negative factors at play.

In fact, Chesbrough at Cox Automotive said one “glaring concern” is used-car supply, especially as the 10-year anniversary of the Great Recession looms.

And the concern is not about having too much; rather, it is about not having enough. 

The tables, it would appear, have turned.

In his analysis, Chesbrough lists these as key impacts on used-car supply:

First, “During the heart of the recession (approximately 2008-2011) the industry lost out on millions of vehicle sales. This is coming back around and resulting in a big hole in supply today, requiring dealers to buy newer vehicles at much higher prices.”

Next, he said: “A strong economy has resulted in fewer repossessions.”

Lastly, “Residual values have been declining over the past couple of years,” Chesbrough said.

On the new-car side, supply is at its lowest point in two years, Edmunds said. Granted, this indicates some realignment of new-car inventory to better meet demand. However, Edmunds said, this is also indication of lower sales versus recent years. 

“There are a lot of things working against the automotive market right now: Incentive spending is maxed out, interest rates are rising, and vehicle prices are reaching record highs,” said Jeremy Acevedo, manager of industry analysis at Edmunds, in a news release, referring to the new-car market.

“Add to that the uncertainty that comes with renegotiating NAFTA and tariff talks and it amounts to what could be a challenging back half of the year for automakers.” 

In a data set going a bit further back, Experian shared some payment data for both new and used, pointing out that new- and used-vehicle monthly payments hit record highs during the second quarter, with the average new monthly payment increasing $20 year-over-year to $525, and the average used monthly payment increasing $13 over the same time period, reaching $378.

The numbers foretell how dramatic inventory planning must change if dealers want to keep their used-car lots filled.

Decreasing new-car sales, declining lease originations and consumers keeping vehicles longer are together tightening the supply of used cars. New-car dealers feel the pinch, and so too do independent and buy-here/pay-here (BHPH) operators.

Some say the car business now is more about acquiring the right cars from the right sources than about selling them.

Increasingly, dealers must rely on sourcing more inventory from private parties and trade-ins, and by stocking “alternative” vehicles to the “A-listers” in tight supply, advised Ed French, president of AutoProfit Automotive Consulting.

The tightening used-car supply — buffeted by decreasing new-car sales, declining lease originations and many consumers keeping vehicles on the road longer — means new-car, independent and buy-here/pay-have to look harder for the used cars they need.

J.D. Power/LMC projected a 2018 seasonally adjusted SAAR of 16.1 million to 17.1 million units. The lower of the two forecasts would place SAAR at early 2014 levels. For now, used-car sales remain brisk and are expected to continue, the firm said.

However, the Cox Automotive 2018 Used Car Market Report and Outlook reported vehicles aged 6 to 10 years old are in short supply.

IHS Markit 2016 data noted the average age of light trucks and cars is increasing, to 11.6 years, up 0.2 years since 2014. A news release on that data, released in November 2016, also noted trends.

“The shifting dynamic of the age of vehicles in operation indicates the volumes of vehicles in the new to 5-years-old category will grow 16 percent by 2021, while vehicles in the 6- to 11-year-old range will grow just 5 percent, and vehicles that are 12-plus years old will grow 10 percent. The oldest vehicles on the road are growing the fastest — with vehicles 16 years and older expected to grow 30 percent from 62 million units today to 81 million units in 2021. More than 20 million vehicles on the road in 2021 will be more than 25 years old,” IHS Markit reported.

Online search engine and research firm iSeeCars.com recently said that most new vehicles are traded or otherwise sold after 7.4 years.

iSeeCars.com’s most recent 2018 data also highlighted how long some new car owners keep their vehicles. The company analyzed more than 6 million used vehicles sold by original owners to identify which models are kept the longest. The average for the top 10 models, said communications manager Julie Blackley, ranges from 8.3 to 9 years or nearly 11 percent and 21 percent longer than average, respectively. 

The data noted SUVs accounted for five of the top 10 listings, with the Corvette, a minivan, and three sedans rounding out the list.  In descending length of ownership, the five SUVs are Ford Expedition, 9 years; Toyota Sequoia, 8.9 years; Toyota 4Runner, 8.8 years; Ford Explorer, 8.4 years; and Chevrolet Suburban, 8.4 years. A related study by iseecars.com indicated that long-held large SUVs are the vehicles most likely to roll up 200,000 or more.

Reasons consumers keep SUVs longer are probably apparent. All vehicles today are built better than in prior years, including mechanical and components as well as their protection against body panel corrosion. Body-on-frame construction for SUVs gives them truck-like durability, Blackley noted, and because of their size, families tend to hang onto them as family haulers.

Another insight, from March 2018 Experian data, noted that model years 2007 to 2013 represented 31.1 percent of the 272 million cars on the road.

While many cars will present with higher mileage — and iSeeCars.com says 2.4 percent will have more than 200,000 miles, mostly SUVs as noted — they are also the bread-and-butter for many independents’ and buy-here/pay-here dealers.

The numbers also show why dealers are having to forgo acquiring some makes and models they’d prefer to stock and instead need to pursue what French defines as Alternative B and C options.

“If I can buy a Santa Fe or other alternative B car with a higher content level than the Explorer my customers would prefer I stock, can I get them to consider this other make and model that might, after all, be hundreds if not thousands of dollars less than the Ford?” French said.

“Every dealer is in this situation, and if owners are keeping their Explorer 8.4 years all dealers are suffering,” he said.

With everyone scrambling for the same-sized buy, those with deeper pockets and better acquisition strategies are best suited to come out winners.

“The franchise dealers have a built-in trade network, but for the independents sourcing inventory getting cars is getting tougher. It’s not necessarily that there are not enough cars, but not enough makes and models consumers want to buy,” French said. “All dealers now have to source inventory from private parties.”

Doing so is a two-dealership operator, TruWorth Auto, with stores in Indianapolis and Kokomo, Ind. French is a member of the organization’s board of directors. TruWorth started operations in 2011. The stores retail 120 units a month and inventory a mix of 3- to 8-year-old vehicles having under 120,000 miles on their odometers.

“Our goal is to source 60 to 70 percent of our inventory from off the street or trade-ins,” said Nick Hardwick, general manager for TruWorth Auto’s Kokomo, Ind., independent dealership. Between this and TruWorth’s Indianapolis location, the dealership retails 120 units a month.

“Last month we bought 87 vehicles off the street and took in 45 in trade, and we acquire about 20 or so units using online auction services,” Hardwick said. 

Private-party and alternative inventory sourcing aren’t new strategies, but dealers must rely on these channels more and more. French advised all dealers to create internal sourcing-buying centers that focus on non-auction sources for fresh inventory.

“These are folks that work all day long to buy cars,” French said.

That’s the philosophy used at TruWorth Auto, though its sourcing centers are its people, Hardwick said. “This idea is ingrained in our culture. Staff is compensated for buying and selling and when that’s your focus you get good at both.”

The dealership also uses a variety of third-party digital tools for sourcing private-party leads — “and we use old school personal networking too,” Hardwick added.

An assessment of supply is critical to understanding future residual price trends, though difficult to calculate. Our aim here is to help readers better understand the drivers of used-vehicle supply in the U.S.

In 2015, about 17.5 million new cars and trucks were sold in the U.S. Let’s assume that all of these vehicles were 2015 model year and that such vehicles are not sold in adjacent years. In the future, this cohort of 2015 vehicles will be traded in and repoed, bought from used car dealers, exchanged privately, totaled by insurance companies, driven into the ground, repaired, stripped for parts and ultimately scrapped. Some 2015 model year vehicles will be exported to other countries, while a much smaller number of foreign vehicles will be imported. 

What we know for a fact is that 2015 vehicles will never again be produced. The stock of such autos can and will decline in future, but it can never increase.

There are actually only three ways to increase the supply of 3-year-old cars in the U.S. First: produce an extra new car today and then wait for three years. Second: import an appropriately aged used vehicle from overseas. Third: rescue a vehicle that, for whatever reason, had been removed from the current cohort of 3-year-old vehicles.

The first of these is the main driver of used vehicle supply. We find, quite reliably after controlling for demand-side ructions, that declines in used car prices lag increases in new vehicle sales by between 18 months and two years. 

In terms of used vehicle exports, data are somewhat spotty, but reveal that in 2013 about 800,000 used vehicles were transferred abroad. Used cars and trucks typically flow from richer countries to poorer countries so apart from the odd vintage car enthusiast bringing home a beloved 1964 Porsche 911, we can surmise that vehicle exports exceed imports by a healthy margin. One can imagine that exports are impacted by domestic prices, rising when U.S. prices are suppressed and falling when local prices are relatively high. 

The third supply driver — the rate at which older vehicles are retired — is perhaps the most interesting of the three. We know from the Cuban experience that when new vehicle production or imports are severely curtailed, the value attached to older vehicles rises apparently without limit. In the U.S., the supply dynamics are less stark but people still make supply decisions when determining, for example, whether to repair the blown head gasket on their 1998 F-150 or buy a different car. Cars are often retired when they still have many years of safe motoring ahead of them. People may even retire perfectly good cars just because they like the features offered on newer models. If the propensity to retire vehicles ever rises, this represents a supply contraction that will potentially impact used vehicle prices.

Just as important is a consideration of the things that do not increase the supply of used cars. If, for example, my neighbor offers to buy my three-year-old hatchback and I agree to sell it, there is no change in either the demand or supply position of the market. Yesterday I was consuming the vehicle and my neighbor was catching the bus to work; today our roles are reversed.  

The next question we must address is whether these dynamics change if a dealer acts as a middleman to the transaction between myself and my neighbor. While the dealership is providing an indispensable retail service by matching my needs with those of my neighbor, the only way a used car dealer can impact supply is by opting to send a vehicle in their possession off to the salvage yard.

There is no doubt that dealer inventories can rise if there are too many sellers and not enough buyers. This issue is currently a major concern because of the flood of off-lease vehicles that have been present in the industry over the past few years. The critical thing to keep in mind is that the total number of 2015 vehicles in circulation in the U.S. is unaffected by the nature of their original financing arrangements. For off-lease volume to be a genuine problem we would need the demand for clocking miles in three-year-old cars to decline relative to the normal level. There is no evidence that this phenomenon has recently occurred.

So what explains the declines we have witnessed in used car prices over the past few years? For one thing, prices entered this period at an aggregate level that was well above trend. This occurred because new vehicle sales fell by half during the Great Recession — causing supply to contract — and only slowly recovered in the years immediately afterward. The paucity of 2008 model year vehicles is a market feature that is still in evidence today. 

New vehicle production and sales then increased at a steady clip in recent years, causing prices to fall back toward trend levels. Americans have also shown an increased propensity to keep older cars in operation for longer and this has also helped to boost available supply.

Trading used cars among ourselves is great for generating retail service fees for dealers but it has no bearing on vehicle supply. When analyzing possible implications for residual prices, market participants would be wise to ask whether a particular event adds to or subtracts from the size of the vehicle fleet. 

It is only these events that can influence vehicle supply, and therefore vehicle prices. 

Tony Hughes is a managing director at Moody’s Analytics, where he leads the development of used-car price forecasts.

Though up more than 13 percent from February, the number of late-model units hitting the auction lanes in March continued what’s looking like a slowdown from 2017.

According to the latest Guidelines report from J.D. Power Valuation Services, late-model auction last month was down 11.7 percent year-over-year.  

While the year-to-date decline eased from February (where it was 5.8 percent), first quarter late-model volume was still down 5.3 percent in March, the report said.

“At the segment level, so far year-to-date, some of the largest volume increases have been observed among SUV segments, ” J.D. Power analysts said in the report, pointing out luxury compact utility vehicles (up 71.7 percent) and large utility vehicles (up 27.8 percent).

Elsewhere in the report, J.D. Power did note one particular segment — albeit, not just within late models, but vehicles up to 8 years in age — that saw a massive jump in volume last month.

Auction volume for luxury large utilities climbed almost 24 percent from February. Year-to-date, it has jumped 3.9 percent. And that “isn’t helping prices” for the segment, which were down 3.1 percent in March.

Another year of 10 million cars

Overall, you can expect another year of 10 million wholesale vehicles at traditional, brick-and-mortar auto auctions in 2018, according to Cox Automotive’s 2018 Used Car Market Report & Outlook. 

That report’s section on wholesale volumes and pricing was written by Zohaib Rahim, manager of economic industry insights at Cox Automotive .Rahim said wholesale volumes at physical auctions should remain at this “near-record” height referenced above. In 2017, the tally was close to 10 million, according to an estimate of member auction sales by the National Auto Auction Association cited in the Cox Automotive report.

However, look for a spike in the number of cars going into off-site digital channels, Rahim said in the report.

“If 2017 was the year of traditional auctions, 2018 will be the year of an increase in non-traditional channels,” Rahim wrote. “Total wholesale transactions in a given year are more than twice the NAAA-member volume. Other channels include direct sales between dealers — sometimes with a wholesaler as an intermediary — commercial accounts selling directly to dealers or retail customers, and sales at non-NAAA member auctions.”

Rahim goes on to point out that lease returns, a major source of used-car supply, will go through a number of various channels — including, but not limited to, the physical auctions — to reach the wholesale market.

“Still, despite the large volume in the other channels, it is the real-time, competitive-bid price discovery in the auction channel that serves as the benchmark for pricing in the other venues,” Rahim said.

The year has started with a big push in volume for newer used cars, as nearly 273,000 late-model units made their way into the auction market last month.

And that includes massive lifts from some SUV and truck segments. 

That’s according to the latest Guidelines report from J.D. Power Valuation Services, which said auction volume for late-model vehicles — i.e. cars from the 2015 through 2018 model years — was up 33.8 percent month-over-month.

However, January’s late-model auction volume total was off slightly (down 0.8 percent) from the same month a year ago.

The lifts in truck and SUV volume were particularly strong, J.D. Power said, with SUVs topping the industry: There was a 63.1-percent hike for compact premium SUVs and a 24.9-percent jump for large SUV volume.

Looking at the breakdown of late-model vehicle volume at auction in January, 54 percent were cars and 46 percent were trucks, according to J.D. Power. 

So cars still dominate the volume. Still, the gains in truck and SUV auction volume could be a welcome sign for some who have found that the mix in vehicles coming off lease, for instance, hasn’t reflected consumer demand on the retail side.

“That is absolutely off-balance,” said AutoNation chief executive Mike Jackson, when asked during the retailer’s latest earnings call if the vehicle mix among the off-lease volume was in line with consumer demand. 

“But the way you have to think about it is, these are vehicles that were put in the marketplace three or four years ago, and the shift had already started towards trucks back then and has only accelerated since then,” Jackson said. “So it’s not ideal, and that then will be reflected in the pricing.

“But still, it’s a value point for consumers and a volume of choice that they never had before.”

In a conference call with media earlier this month, Autotrader executive analyst Michelle Krebs shared an example of a specific vehicle that’s often turned first in the fleet segment and then impacted by the appeal of utilities.

She added how the matter is compounded with an off-lease surge of popular models.

“With the (Chevrolet) Cruze, that’s a car that has significant fleet sales. When GM cuts back on fleet, it’s going to hit vehicles like the Cruze,” Krebs said.

“There’s are going to be a lot of off-lease utility vehicles coming back into the market so someone might be thinking about a brand new Cruze because that what’s they can afford — and I’m not picking on the Cruze — but they really want a sport utility. And now they’ve got more choices with more 3-year-old utilities in the market,” she went on to say.

Staff writer Nick Zulovich contributed to this report. 

More than 2.8 million late-model vehicles hit the auction market last year, according to J.D. Power Valuation Services.

This marked a 3.2-percent bump in late-model auction volume, the company said in its latest Guidelines report.

Some of those, of course, would be off-lease vehicles. Cox Automotive is anticipating 3.89 million off-lease units in 2018, which would be up from 3.59 million in 2017.

While that’s more than an 8-percent hike, the growth in off-lease volume is slowing down a bit.

Off-lease volume in 2017 was up more than 16 percent, following a more than 22-percent gain in 2016, according to data in a Cox Automotive presentation.

Still, 2018 is expected to be a record year for lease returns, according to Edmunds.

Case in point: there were 4 million vehicle leases written in 2015, the company said in its 2018 Automotive Industry Trends report, which was a 12-percent hike.

The following year was the peak, with just under 4.5 million lease originations, before the market trimmed down below 4 million again in 2017, Edmunds said.