Webb: Q3 Wholesale Price Movements Continue ‘Healthy Market Realignment’
After sharing where the Manheim Used Vehicle Value Index settled for September, chief economist Tom Webb explained what he called a “continued healthy market realignment,” which produced the steepest quarterly wholesale price drop since the close of 2008.
During his quarterly conference call last Friday, Webb indicated that Manheim’s data showed wholesale prices softened by 3.4 percent year-over-year during the third quarter. That decrease was the biggest quarterly drop since the juncture Webb noted as “disastrous,” the fourth quarter of 2008 when prices sunk by nearly 10 percent.
“Nevertheless, I would continue to describe what we’ve seen for all of 2012 is as I have described it in the past. I’ve called it a healthy realignment in the wholesale market,” Webb said.
“Sellers certainly knew that 2011 prices could not be sustained. Buyers knew that they were paying too much, but of course they had no choice,” he continued.
Webb went on to describe the wholesale market movement by using an analogy a veteran of Wall Street utilized.
“If the music keeps playing, you’ve got to keep dancing,” Webb quipped. “That’s true even if you know it’s a game of musical chairs.
“In this instance, I don’t think a lot of chairs are going to be moved now that the music has stopped,” he continued. “In fact, I think the continued market realignment will leave us in a better place with prices still high but not disruptively so.”
“Of course, not everyone agrees with me,” Webb admitted.
When explaining how used-vehicle observers might try to punch holes in his reasoning, Webb recollected wholesale prices movements that dealers might remember happening 10 years ago.
“Some have suggested that we will see a big drop in prices some of what we saw in 2002 and 2003, which was a time when a lot of off-lease were coming back with subvented leases,” Webb stated. “Let me suggest where my disagreements may lie.
“For one, I do not believe as many do that the run-up in used vehicle prices over the past three-plus years has been simply the result of low supplies,” he stressed. “Certainly, it was a major factor in 2009, but it was less of one in 2010 and even less of one in 2011. This year, I believe it’s been virtually a non-issue.”
To back up his claim, Webb pointed to the rental-risk market. He indicated the percentage of rental risk units entering the lanes increased by double digits during the first half of this year.
“This is a market that pretty much competes unto itself. But despite the jump in volume, there was no declination in price,” Webb emphasized.
“That I believe is a testament to the manufacturers’ discipline on the new-vehicle side of the market, a discipline which was enabled by permanent restructuring within the industry,” he continued. “I do not believe we’re headed back to the wicked ways of the past when many manufacturers’ sales and marketing tactics were in fact direct opposition to the goal of protecting residual values.”
Webb finished his quarterly analysis by making one other point regarding his theory detractors.
“Additionally, I would suggest that even if you are of the opinion that the run-up in prices was solely the result of low supplies, then you would have to contend that there will be a rather significant jump in supplies in 2013,” Webb maintained. “I do not believe that will be the case.”
Manheim Index Unchanged in September
Webb began his conference call by noting wholesale used vehicle prices (on a mix-, mileage- and seasonally adjusted basis) were unchanged in September after declining in each of the previous five months.
As a result, the Manheim Used Vehicle Value Index remained at 120.7, which represented a 1.8-percent decline from a year ago.
“September's stabilization in wholesale pricing reflected strong underlying dealer demand created by higher retail sales volumes,” Webb explained.
“Shifting conversion rates suggest that the realignment in wholesale pricing has not yet fully played out, but that the marketplace maintains the flexibility to make needed adjustments without being disruptive to either buyers or sellers,” he continued.
In September, Webb noticed vehicles in the $8,000 to $11,000 price range attracted the strongest bidding.
“Higher-priced units, which are generally newer model units, showed some weakness,” Webb noted. “But, generally, that was related to specific models where the manufacturer had special model-year closeout programs in effect.”
Webb also mentioned valuations in the luxury segment stabilized.
“Over the past year, the broad SUV segment has been the weakest market category,” Webb pointed out. “However, within that overall segment, crossovers have outperformed the total market.
“Sports cars and midsize sedans are the only two broad categories with year-over-year price gains,” he went on to say. “During the past quarter, the luxury car segment has turned around and slightly outperformed the overall market.”