The surge Hurricane Harvey created still is rippling through the wholesale market.
Black Book reported that its Used Vehicle Retention Index for September posted the largest month-over-month gain since March 2012. The index reading increased from 112.6 to 113.9.
Hurricane Harvey caused major flooding throughout parts of Texas, resulting in an estimated up to 500,000 cars and trucks needing to be replaced. The replacement process began in September, with compact cars (up 2.8 percent), compact crossover SUVs (up 2.4 percent), full-size cars (up 2.5 percent) and mid-size cars (up 2.3 percent) each seeing significant month-over-month increases within the Index.
“We certainly anticipated a near-term increase in the Index in last month's report, and with the storm replacement activity kicking in we believe this activity will continue in the next month but not much longer,” said Anil Goyal, senior vice president of automotive valuation and analytics for Black Book.
“We saw a nice bump in several car segments, and we also anticipate several truck segments to see increases as well, especially with the demand for service and construction vehicles. It was interesting that mainstream car segments and compact SUVs experienced the largest increase in immediate replacement demand,” Goyal continued.
The Black Book Used Vehicle Retention Index is calculated using Black Book’s published wholesale average value on 2- to 6-year-old used vehicles, as a percent of original typically equipped MSRP.
The index dates back to January 2005, where Black Book published a benchmark index value of 100.0 for the market. During 2008, the index dropped by 14.1 percent, while during 2016, the index fell by just 6.4 percent. During 2011, the index rose strongly from 113.3 to 123.0 by the end of the year as the economy picked up steam and used vehicle values rose higher.
It continued to remain relatively stable, rising slightly until May of 2014 when it hit a peak of 128.1.
To obtain a copy of the latest Black Book Wholesale Value Index, go to this website.
With fall officially arriving, dealer behavior is changing accordingly based on the data and observations included in the latest Black Book Market Insights report.
Along with more perspective on hurricane-related buying, editors shared in this week’s rundown that truck segments performed much better than car segments. Three vehicle categories within the truck segments increased in value last week, including compact crossovers, compact vans and small pickups.
“Depreciation was steep on luxury cars and sporty cars while smaller cars, SUVs and pickup trucks held their values relatively well last week,” said Anil Goyal, Black Book’s senior vice president of automotive valuation and analytics.
Volume-weighted, Black Book indicated that overall car segment values decreased by 0.38 percent last week, close to the average weekly drop of 0.33 percent in values registered during the previous four weeks.
Editors noticed midsize, compact and sub-compact cars performed well, while prestige luxury car and premium sporty car segments declined the most.
Again volume-weighted, Black Book found that overall truck segment values (including pickups, SUVs and vans) softened by 0.17 percent last week, similar to the average weekly decrease of 0.14 percent in values spotted during the previous four weeks.
Editors mentioned the full-size luxury crossover/SUV and minivan segments dropped the most among truck segments by 0.43 percent and 0.46 percent, respectively.
Turning next to what Black Book’s representatives in the lanes reported back to headquarters, various auctions are involved in how dealers impacted by hurricanes are responding.
From Texas: “Consignment was off a little today, but the prices are holding steady.”
Another anecdote from the Lone Star State added: “The rental lanes are doing well with compact cars experiencing strong sales. The price point on those vehicles makes them popular as flood-replacement vehicles.”
And from Florida: “Buyers are being cautious and only purchasing vehicles as replacements for previous retail sales.”
Up North where the leaves are likely already turning to red and gold, dealers are bracing for when it turns cold and shopper behavior changes accordingly.
From Michigan: “Retail is just OK in the area. Two wheel drive SUVs and pickups have begun their seasonal dip in values.”
From Massachusetts: “The change in weather has prompted the usual shift in dealer buying. There is more caution and hesitation in the bidding process.”
While the September used-vehicle sales projection might not show it, dealers are certainly bracing for additional sales stemming from hurricane-damaged vehicles that need to be replaced.
And it’s reflecting in how prices are moving, according to the latest this week’s Black Book Market Insights report. Editors found that prices for both compact cars and crossovers were strong as dealers, especially in Texas, search from long distances for inventory that hasn’t been touched by floodwaters.
“Nearly all segments besides luxury vehicles and sporty cars performed well last week as buyers from Texas bid up prices to acquire replacement vehicles,” said Anil Goyal, Black Boo’s senior vice president of automotive valuation and analytics, who also is one of the many experts on the docket for Used Car Week, which begins on Nov. 13 in Palm Springs, Calif.
Based on volume-weighted data, Black Book determined overall car segment values decreased by 0.19 percent last week, much better than the average weekly decrease of 0.42 percent in values spotted during the previous four weeks.
Editors said, “Compact cars performed the best while sub-compact, midsize, and full-size car values were strong as well with no depreciation last week.”
Again looking at volume-weighted information, Black Book found that the overall truck segment values — including pickups, SUVs, and vans — decreased by 0.10 percent last week; an improvement compared to the average weekly decrease of 0.19 percent in values noticed during the previous four weeks.
Subcompact crossover and compact crossover/SUV segments increased the most among truck segments by 0.46 percent and 0.39 percent, respectively.
Turning next to what Black Book’s representatives noticed in the lanes, observers watched Lone Star State dealers hunt for vehicles. Apparently Texas dealers are looking to auctions in Georgia to find what they need.
“It was a mixed bag at the auction this week. It seemed like there was no in-between as the reps were either selling everything or selling very few. The lanes that were selling were heavily influenced by the Texas online buyers,” said Black Book’s lane watcher stationed in Georgia.
Black Book’s representative stationed in Texas added, “The sales percentages and prices are high as you would expect after Hurricane Harvey. Dealers say that they will have to be diligent in their inspections for the next few months as damaged or damage repaired vehicles will be available.”
Even on the West Coast, hurricane impact can be seen as Black Book’s observer in California mentioned, “Several dealers stated that they are buying vehicles that will be loaded up and transported east to Texas.”
It’s also happening in the Midwest since Black Book learned from Wisconsin, “While local buying is not great, the internet sales are doing quite well due to the replacement vehicles being purchased for Texas.”
Also out of the nation’s midsection, Black Book’s other anecdote from Illinois mentioned, “There was strong bidding here, and the prices continue to hold their own. All in all a pretty good fall market.”
Like KAR Auction Services noticed as well, both Cox Automotive and J.D. Power Valuation Services are watching closely how Hurricanes Harvey and Irma are impacting used-vehicle prices in September. And evidence is prompting analysts to modify their expectations for where the price readings might be by the end of the month.
According to a note shared with Auto Remarketing, Cox Automotive chief economist Jonathan Smoke is already seeing early indicators that would push the Manheim Used Vehicle Value Index to a fifth straight record high. Smoke noted that prices are on pace to be 3 percent higher on a sequential basis and 6 percent above the year-ago reading.
“These are significant increases,” Smoke said. “If the pattern holds for the rest of September, we will be seeing the strongest annual price gains since 2010, when the economic recovery was beginning, and used car supply was severely limited.
“All seven light-vehicle segments are seeing price gains month-to-month and year-over-year. Even lowly midsize sedans, which have been seeing price declines for 10-straight months, are seeing gains this month,” he added.
Meanwhile, the team at J.D. Power Valuation Services highlighted in the September issue of Guidelines that wholesale prices of vehicles up to 8 years in age are expected to decline by approximately 1.8 percent this month; much less than the 3.4 percent drop analysts recorded in September of last year.
Before the storms ripped through Texas and Florida, J.D. Power Valuation Services indicated that its September expectations included a 2.8-percent price dip with projected demand prompting analysts to make an adjustment.
“The impact of recent hurricane activity has affected the market for new and used vehicles in the United States,” analysts said in the report. “We have updated our September 2017 values to better reflect current market conditions.”
“While estimates of the number of vehicles damaged by Hurricanes Harvey and Irma have a large range, it is clear the reduction in vehicle supply and the accompanying demand for replacements is significantly large. As a result the used-vehicle market will be affected,” they continued.
Analysts added that they are “monitoring this situation closely. Based on previous corollary events, we are implementing adjustments to our forecasts for values in September and October and potentially further into the future.”
As far as September goes, J.D. Power Valuation Services still thinks car losses are expected to outpace softening of prices of trucks and SUVs.
“Midsize and large pickups continue to perform very well and are forecast to outperform the industry average,” the report noted. “Losses for all premium segments are forecast to fall by slightly more than the industry average for the month.”
And as the industry moves deeper into fall with the ramifications of Harvey and Irma in play, J.D. Power Valuation Services reflected back on Superstorm Sandy (October 2012) and Hurricane Katrina (August 2005), noting how each storm trigged moderate and brief increases in used-vehicle values that “are not readily explained by coincidental economic factors.”
Analysts went on to say in the report, “The historical corollaries suggest the impact will dissipate after three to four months. Additional updates will be provided regarding adjustments in the future based on all available information and analysis.”
August price analysis
In the same installment of Guidelines, J.D. Power Valuation Services reported that wholesale prices of vehicles up to 8 years in age softened by 1.2 percent in August. Looking back over the past five years, price declines averaged 2.2 percent during August.
As a result of the latest movement, J.D. Power Valuation Services’ Seasonally Adjusted Used Vehicle Price Index rose by 1.1 percent to 111.5; the largest index climb since May of last year.
Looking at segments, large cars led the price declines, softening by 2.6 percent and falling in line with the average decrease of 2.4 percent analysts spotted during the past five years.
Midsize van values dipped by 2.1 percent in August with decreases for compact and midsize utilities both coming in at 1.3 percent.
On the premium side of the market, the report mentioned losses for luxury large utilities (down 2.3 percent) and luxury midsize cars (down 2.2 percent) led the way. However, analysts spotted a 0.4 percent uptick for luxury large cars, the first positive August movement for this segment since 1998.
Hurricane Harvey landed in Texas with a week left in August, and its flooding left an immediate impact on wholesale price movements for the month, according to KAR Auction Services chief economist Tom Kontos.
According to ADESA Analytical Services’ monthly analysis of wholesale used-vehicle prices by vehicle model class released on Wednesday, wholesale used-vehicle prices in August averaged $10,947. The reading represented 0.6 percent uptick compared to July and a 1.9 percent rise relative to August of last year.
“Average wholesale prices in August were once again up largely on the strength of truck prices, although another factor could be early impacts from Hurricane Harvey, which appeared to drive prices up at the end of the month, particularly in Texas,” Kontos said in his latest Kontos Kommentary.
“Luxury cars had a stand-out month, with significant average price increases on both a monthly and annual basis,” added Kontos, who is set to appear again during the National Remarketing Conference at Used Car Week, which begins on Nov. 13 in Palm Springs, Calif.
Kontos also continued his analysis of fleet and off-lease midsize cars and midsize CUVs/SUVs; units likely to have between 36,000 and 45,000 on the odometer. He found that price softening was less evident in August than in previous months when holding constant for sale type, model-year age, mileage, and model class segment.
In fact, midsize car prices were up on a year-basis as they rose by $113 to $11,667.
“Last month, we noted that midsize SUV/CUV prices were reversing their previous trend and softening more than midsize car prices, and this month the two bellwether segments moved in opposite directions. This pattern may change in the aftermath of Harvey, as truck demand in Texas should ramp up,” Kontos said. He also elaborated about this point in a video available here as well as at the top of this page.
Kontos closed his analysis by mentioning average wholesale prices for used vehicles remarketed by manufacturers climbed 4.6 percent month-over-month and up 6.5 percent year-over-year.
Prices for fleet/lease consignors were up 1.4 percent sequentially and up 2.3 percent annually.
He also mentioned average prices for dealer consignors softened by 1.2 percent versus July and jumped by 3.0 percent relative to August of last year.
ADESA Wholesale Used-Vehicle Price Trends
| |
Average |
Price |
($/Unit) |
Latest |
Month Versus |
| |
August 2017 |
July 2017 |
August 2016 |
Prior Month |
Prior Year |
| |
|
|
|
|
|
| Total All Vehicles |
$10,947 |
$10,887 |
$10,738 |
0.6% |
1.9% |
| |
|
|
|
|
|
| Total Cars |
$8,732 |
$8,613 |
$8,675 |
1.4% |
0.7% |
| Compact Car |
$6,624 |
$6,582 |
$6,597 |
0.6% |
0.4% |
| Midsize Car |
$7,639 |
$7,633 |
$7,748 |
0.1% |
-1.4% |
| Full-size Car |
$7,063 |
$7,018 |
$7,651 |
0.6% |
-7.7% |
| Luxury Car |
$14,003 |
$13,582 |
$13,356 |
3.1% |
4.8% |
| Sporty Car |
$13,903 |
$14,164 |
$13,605 |
-1.8% |
2.2% |
| |
|
|
|
|
|
| Total Trucks |
$13,036 |
$13,058 |
$12,751 |
–0.2% |
2.2% |
| Minivan |
$8,777 |
$8,064 |
$8,183 |
2.0% |
7.3% |
| Full-size Van |
$12,317 |
$11,875 |
$13,350 |
3.7% |
-7.7% |
| Compact SUV/CUV |
$10,468 |
$10,467 |
$10,673 |
0.0% |
-1.9% |
| Midsize SUV/CUV |
$11,407 |
$11,402 |
$11,448 |
0.0% |
-0.4% |
| Full-size SUV/CUV |
$13,353 |
$13,353 |
$13,292 |
0.0% |
0.5% |
| Luxury SUV/CUV |
$18,947 |
$19,099 |
$18,610 |
-0.8% |
1.8% |
| Compact Pickup |
$9,599 |
$9,615 |
$8,485 |
-0.2% |
13.1% |
| Full-size Pickup |
$16,989 |
$17,061 |
$16,141 |
-0.4% |
5.3% |
Source: ADESA Analytical Services. July data revised
With some interesting anecdotes about how dealers are handling hurricane fallout, Black Book also highlighted how one specific segment impacted the entire truck segment.
This week’s Black Book Market Insights report mentioned compact SUVs increasing their value noticeably, giving the truck segment an overall boost in retention value.
Editors noticed the car segment depreciated by a standard amount with only one vehicle category — midsize cars — increasing in value by 0.13 percent.
“Active buying continued last week as Texas dealers replenished their inventory. Compact SUVs and midsize cars did well,” said Anil Goyal, Black Book’s senior vice president of automotive valuation and analytics, who is among the wide array of experts coming to Used Car Week, which begins on Nov. 13 in Palm Springs, Calif.
Volume-weighted, Black Book reported that overall car segment values decreased by 0.48 percent last week, similar to the average weekly decrease of 0.41 percent in values over the previous four weeks.
Editors noticed luxury and sporty vehicles in car segments declined the most at 0.87 percent each.
Again volume-weighted, Black Book pointed out that overall truck segment values (including pickups, SUVs and vans) were nearly flat compared to the average weekly decrease of 0.27 percent in values spotted during the previous four weeks.
Editors reported the compact crossover/SUV and compact van segments increased the most among truck segments by 0.37 percent and 0.51 percent, respectively.
As Goyal referenced, Lone Star State dealers are heading to the lanes to find vehicles as consumers impacted by Hurricane Harvey are looking for replacement vehicles. In fact, one of Black Book’s observers at a Georgia auction watched the action happen.
“A dealer from San Antonio bought a lot of vehicles for strong money. He stated that he usually buys 15 units a week but bought 41 at this auction alone today to meet the demand back home,” Black Book’s representative said.
Within the state of Texas, the activity was even more intense.
“Sold almost everything today, and the buyers that usually don’t buy high mileage units were not discriminating today,” Black Book’s lane watcher in Texas reported.
Another report from Texas added, “Hundreds of flooded new vehicles at the auction where they were marshalling them before they were to be crushed.”
Black Book’s other two reports from the lanes mentioned much less active scenes.
From Tennessee: “Lots of no-sales as dealers and commercial accounts are holding their floor prices in advance of the anticipated high demand caused by the recent storms.”
From Colorado: “Low attendance and low vehicle volume but the vehicles that were here sold well.”
Tesla has been increasing its used-car sales this year, and based on discussion in its latest quarterly earning filing with the Securities and Exchange Commission, that trend will likely continue.
And when looking at Tesla’s volume in the auction lanes, those numbers have increased, as well, albeit from a small base.
According to data that J.D. Power Valuation Services shared with Auto Remarketing, Tesla’s year-to-date auction volume is up 160 percent through August, coming in at 670 units.
A year ago, Tesla’s auction volume through eight months was at 258 units, according to the J.D. Power data.
In August alone, Tesla’s auction volume was at 118, increasing dramatically from the 33 units in August 2016.
Used pricing trends
When consumers are shopping for Teslas, they are likely going to be interested in how well these cars hold their value.
For one model in particular, retention appears fairly strong.
Autolist.com projects that the Model 3 will depreciate 29 percent after 50,000 miles and 50 percent at the 100,000-mile mark.
The company said in a post on its website, “Looking at the Model S, its competitors and their in-brand counterparts, if the Model 3’s depreciation tracks analogously to the Model S and its gasoline rivals, the projected trajectory would be best in class.”
For instance, at the 100,000-mile mark, Autolist has the Audi A4 to have 60 percent depreciation, with the BMW 3-Series a couple points under 60 percent and the Mercedes-Benz C-Class hitting around 50- to 55-percent depreciation.
The company based the Model 3 projection on the Model S data. The full data set from Autolist can be found here.
More on Tesla’s used-car sales
In its SEC filing, Tesla explains that pre-owned car sales are included in a revenue category called “services and other revenue,” along with maintenance services and the sales of electric vehicle powertrain components and systems Tesla makes for other manufacturers.
That slice of Tesla’s business was up 157 percent year-over-year (a $131.9 million spike) in the second quarter.
“This was primarily due to an increase in pre-owned vehicle sales as an organic result of increased automotive sales as well as from expansion of our trade-in program. Additionally, there were increases of $10.4 million from powertrain sales to Daimler, $10.2 million from the inclusion of engineering service revenue from Grohmann, which we acquired on January 3, 2017, and an increase in maintenance services revenue of $9.3 million as our fleet continues to grow,” Tesla shared in the filing.
“In future periods, we do not anticipate meaningful revenue from sales of powertrain or other vehicle systems and components to third parties,” it continued. “However, we anticipate that revenue from sales of pre-owned vehicles will continue to increase as the volume of pre-owned vehicle sales increases and that revenue from services by Grohmann will decrease as we primarily consume internally its services.”
Year-to-date, the increase in the “services and other revenue” component is at 124 percent (a $226.4 million increase). Again, used vehicles were the driving factor.
“This was primarily due to an increase in pre-owned vehicle sales as an organic result of increased automotive sales as well as from expansion of our trade-in program,” Tesla leaders explained. “Additionally, there were increases of $32.6 million from the inclusion of engineering service revenue from Grohmann, an increase in maintenance service revenue of $23.0 million as our fleet continues to grow, and $16.7 million from powertrain sales to Daimler.”
Tesla production
Tesla also noted in the filing that it has ramped up production. In fact, the second quarter was a quarterly record for production; Tesla built 25,708 vehicles.
This occurred even with a lack of 100 kWh battery packs for the Model S and Model X as well as “disruptions from extensive installation of Model 3 manufacturing equipment,” the company said in the filing.
“For Model 3, as is inherent in the production ramp of each all-new product, we expect production to begin slowly, grow exponentially, and then tail off at full production. Accordingly, we expect to achieve a rate of 5,000 Model 3 vehicles per week by the end of 2017,” it said.
“We expect to further ramp to a rate of 10,000 Model 3 vehicles per week, and an annual Tesla vehicle production rate in excess of 500,000, at some point in 2018. We have designed Model 3 to facilitate a ramp to volume production, including through production facilities that are highly dense and automated, resulting in costs of materials and labor for Model 3 that are expected to be significantly lower than those of Model S and Model X,” the Tesla filling stated. “We also expect to make additional investments and preparations as we make milestone-based payments for Model 3 equipment and continue with Gigafactory 1 construction, in addition to expanding our Supercharger, store, delivery hub and service networks.”
Damage by the horrific hurricanes impacting the United States during the past two weeks is starting to influence what Black Book is noticing at the auction.
This week’s Black Book Market Insights report showed a little strengthening in the wholesale space; most likely due to dealers looking to begin replacing damaged or destroyed vehicles caused by Harvey and Irma.
“Dealers are actively looking to buy inventory and shipping vehicles to the Houston area, anticipating strong demand due to replacement of damaged units,” said Anil Goyal, Black Book’s senior vice president of automotive valuation and analytics.
Looking at volume-weighted data, editors found that overall car segment values decreased by 0.27 percent last week, better than the average weekly decrease of 0.49 percent in values spotted during the previous four weeks.
Black Book reported that the prestige luxury car and near luxury car segments declined the most by 0.62 percent and 0.46 percent, respectively.
Again viewing volume-weighted information, editors determined overall truck segment values — including pickups, SUVs and vans ticked 0.15 percent lower last week, an improvement compared to the average weekly decrease of 0.33 percent in values registered during the previous four weeks.
Black Book added that the sub-compact crossover segment declined the most among truck segments, dropping by 0.66 percent.
Beyond the raw data, Black Book’s observers in the lanes watched how dealers who needed inventory because of the storms made moves to get necessary inventory. Editors shared multiple reports coming out of Georgia.
“We would have expected the market to soften after Labor Day, instead values for some model years and segments are moving upward sooner than expected as demand picked up due to hurricane damage,” one lane watcher said.
Another report from the Peach State indicated, “Dealers from Texas were seen buying cars here because they can’t find cars in their area.”
And one more observer stationed in Georgia added, “Rental car units were lower in auctions as they were put back in rental use and the ones for sale had higher miles.”
The other two Black Book representatives who reported back to headquarters this past week shared anecdotes out of the Midwest.
One came from Michigan, which noted, “Retail is slow here, therefore dealers are being very picky in their wholesale purchases. Lots of hesitation as they place their bids.”
A recap out of Illinois mentioned, “A seller expressed that it was a great day for older vehicles and an exceptional day for clean vehicles.”
Make it four straight months of record-high readings for the Manheim Used Vehicle Value Index.
In August, wholesale vehicle prices — adjusted for mix, mileage and seasonality — were up 0.75 percent from July, according to the latest report on the index compiled by Cox Automotive chief economist Jonathan Smoke.
The resulting measure of Manheim’s index was 131.3, a 3.4-percent year-over-year increase and, once again, the highest ever reading for this index.
“Wholesale market values continue to show strength as a result of growing retail demand,” Smoke said in the report. “Most of the increase in used-vehicle sales is coming from double-digit year-over-year growth in sales of vehicles less than 4 years old.”
While Cox Automotive estimates that the seasonally adjusted annualized rate for used-car retail sales in August (38.1 million) was down from July (40.1 million), used-car sales have actually climbed 1.2 percent so far this year.
That includes what was best second quarter ever for the used-car market and the first time there was more than 10 million used-car sales in Q2, according to Edmunds.
Overall, there were 10.05 million used-vehicle retail sales in the second quarter, Edmunds said. That’s a 1.7-percent year-over-year uptick and up 7.9 percent from five years ago.
What’s also up significantly are used-car transaction prices on the retail side.
Edmunds said that consumers paid an average of $19,227 for a used vehicle in the second quarter, the highest ever for Q2. And it’s the older vehicles where the wallet wallop is happening.
Edmunds noted that vehicles 6 years and older have improved their retention, which is driving this surge. For instance, the retention of original MSRP on a 10-year-car in 2012 was 21.1 percent, on average.
It was at 26.4 percent in the second quarter, Edmunds said.
A 10-year-old midsize SUV had 16 percent retention in 2012; it’s now 32.5 percent.
“Vehicle sales reached historic lows during the recession, and now fewer consumers have an older trade-in when they buy a new vehicle,” said Ivan Drury, Edmunds senior manager of industry analysis, in a news release.
“It’s the basic law of supply and demand. People still want to buy affordable older cars, but there simply aren't as many out there,” he said.
Conversely, deprecation has escalated among later-model vehicles. Retention on 1-year-old used vehicles has slid from 76.6 percent in Q2 2012 to 70.9 percent in the second quarter of this year, Edmunds said, with the impact being felt the most in car segments.
This late-model decline largely has been driven by heavy off-lease supply and incentive hikes. And, Drury said, an uptick in leasing.
“The surge in popularity of leasing has led to a more disposable mentality about personal vehicles, which has taken a toll on the values of newer used cars,” he said.
The difference in price on a 1- and 10-year-old car has gone from 55.5 percent to 44.4 percent over the past five years, meaning a less affordable used-car market overall, Edmunds said.
But again, the company emphasizes that retail sales are still strong.
In fact, shifting back to the Cox Automotive analysis, analysts are expecting a 3-percent lift in full-year used-car sales thanks in part to demand for replacement vehicles in southeast Texas following Hurricane Harvey.
“The dynamics of the used market are completely different now than they were five years ago, and we don't see this trend reversing anytime soon,” said Drury, the Edmunds analyst.
“Leasing grew steadily until late last year, so the near-new vehicle stock will continue to grow, and it's going to take time to replenish the supply of older used models,” he said. “It’s good news for those who can afford it, but for shoppers who need to find reliable transportation on a budget, this is a challenging scenario.”
KAR Auction Services chief economist Tom Kontos spent the past few days poring over data and information that he’s encountered in connection with Hurricane Harvey; a storm meteorologists are calling a 1,000-year flood event.
Kontos explained in a special edition of the Kontos Kommentary there are four primary considerations for the automotive industry to understand as gasoline prices climb and the full macroeconomic impact likely taking months to unfold.
Kontos began with looking at total loss units versus damaged vehicles.
“Historically, we know that many of the vehicles damaged in a hurricane are not total losses. For example, in 2012’s Hurricane Sandy, of the 250,000 vehicles damaged only about 160,000 were total losses,” Kontos said.
“For the non-flood damaged vehicles, a total loss is only declared if the cost of repairs exceeds a certain threshold versus the vehicle’s value. So the same storm damage — dents, scratches, shattered glass — on one vehicle may be a total loss, but not on another, depending on their relative values,” he went on to say.
As KAR chairman and chief executive officer Jim Hallett referenced during an earlier conversation with Auto Remarketing, Kontos reiterated that commercial consigners — including the company’s rental, fleet and captive finance customers — are coordinating with KAR to push more units toward Houston and the Gulf region.
Both Hallett and Kontos emphasized that the 13 ADESA auctions in the area are operational and well-positioned to take on this additional inventory.
“But keep in mind, sellers don’t necessarily have to move inventory into the market pre-sale,” Kontos said. “As we’ve seen over the past few years, the volume of vehicles sold at online auctions is growing.
“Our online capabilities can match buyers with sellers and help them find the specific car or cars they are seeking — and then transport them after the sale,” he continued. “And our analytical capabilities can help advise remarketers on the economic desirability of moving inventory versus selling online.”
Next, Kontos touched on what he’s heard from the client roster held by Insurance Auto Auctions. He explained many insured individuals receive checks for the actual cash value, or the current value, of their vehicle — not the cost of a new model.
“As a result, we anticipate an uptick in demand for quality used cars once claims begin to be paid,” Kontos said. “Timing is an important factor here, given the current oversupply of used vehicles stemming from a surge of off-lease units hitting the market.
“While the number of total loss units is still unknown, IAA expects that number to be significant, and could help mitigate some of the downward pressure on used vehicle values by helping absorb this oversupply,” he continued.
Furthermore, Kontos mentioned the regional dynamics likely in play as Houston and the surrounding areas in Texas and Louisiana try to bounce back from Harvey.
“At the micro-level, trucks are very popular in Texas and have resisted the price softening we’ve seen with cars,” Kontos said. “Trucks are holding value better, in part, because gas prices have been low and the supply has been tighter compared to cars.
“The net impact is there will be an increased demand in this region for trucks and SUVs as people seek to replace their total loss trucks and SUVs. Compared to cars, sellers may find more price justification to move truck inventory to Texas,” he went on to say.
Kontos closed with a message to dealers, especially franchised operations that saw vehicles submerged by Harvey’s record rainfall.
“For Houston-area franchise dealers trying to replace damaged inventory, obtaining used car inventory at a time like this may be their best immediate option and value,” Kontos said. “Floor-planning quality used cars is more affordable than new cars, and the current oversupply of off-lease used vehicles means these vehicles are quickly and readily obtainable.
“And a stable of quality used cars will ready-match dealer supply to demand as consumers seek to affordably replace their total loss vehicles,” he continued.
“In summary, Hurricane Harvey is a devastating event for which the whole-car and salvage auction industry stands ready to respond through efficient vehicle disposal and replacement with an abundance of supply,” Kontos concluded.
