Residual values for used cars rose by an average of 3 percent in 2018. The growth in value represents a remarkable turn of events from 2017 when there was significant pessimism about the state of the used-car market. The negative sentiment a year ago was driven by concerns that a glut of used vehicles coming back to the market would cause serious price erosion.
In fact, we saw the opposite take place in 2018 — especially for used compact and midsize cars, which saw prices surge by a whopping 8 percent — demonstrating that there is still strong consumer demand for affordable small and mid-sized cars despite OEM’s focus on bringing SUVs and CUVs to market.
Outlook for 2019
The J.D. Power analysis of the current residual values landscape indicates that used vehicles are filling several important gaps in the overall auto market across the United States.
That is why we are projecting the used market in 2019 to largely mirror what we observed last year, with a few big exceptions.
- We expect to see production cuts in the traditional passenger car segments, which will put upward pressure on prices for new cars in this category, which, in turn, will have an impact on used-vehicle valuations.
- On the other side of the equation, we are keeping an eye on the interest rate situation. Significant interest rate increases could reduce demand for used vehicles in 2019.
- Growth in used-vehicle supply is expected to continue, which will put downward pressure on residual values (a trend we are already starting to see as more used trucks and SUVs re-enter the market).
Overall, we believe the 2019 used-car market will provide a healthy environment for consumers.
In fact, we believe that the used market is going to play a huge role in the industry, as dealer groups place a stronger emphasis on leveraging this aspect of their operations to shore up bottom lines. Dealers, for instance, are making structural changes in the way they sell used cars by:
- Investing in online channels to expand their used car footprint;
- Placing greater emphasis on their certified pre-owned (CPO) offerings; and
- Improving their management of used-vehicle supply channels so that they can fully understand how demand for specific vehicles within their regions — and across the nation — are manifesting themselves.
Integrating data sources to better understand residual valuations
To help the industry manage these evolving dynamics in 2019, J.D. Power has a range of products and services that provide insight into used car residual values, as outlined below:
— We have built a database that identifies option content at the vehicle identification number (VIN) level. We are adding precision to help dealers optimize inventory management.
— We are partnering with a vehicle history company to identify the background of a specific VIN.
— We have developed tools that can access vehicle content data down to the model level to provide a granular insight into how actual supply will impact short- and long-term pricing trends.
The J.D. Power valuation team is integrating these and other features into a set of digital tools that can be accessed by our auto dealer and lender clients via our B2B website, and can be integrated into our clients’ internal analytical tools via newly designed application program interfaces (APIs). Our objective is to help clients make better decisions on inventory management and other key aspects of their business. To learn more about J.D. Power Valuation Services, visit: http://www.nada.com/b2b
Jonathan Banks is vice president and general manager, vehicle valuations at J.D. Power.
Auto Remarketing caught up with Jonathan at the recent NADA Show 2019 to talk about this column, his thoughts on why the used-car market is so healthy and much more. That discussion can be found in the podcast below.