CARY, N.C. -

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.”