While 2018 represented another year of stagnant sales of new cars and trucks, quite the opposite was true for used vehicles. In fact, for most of the year, especially during the summer months, used vehicles maintained much of their prices and values compared to the last few years. Typically, summer is when most used cars and trucks begin to see prices drop, and this depreciation accelerates throughout the remainder of the year.
However, in 2018, we saw a strong spring season after the replacement demand stemming from the 2017 hurricanes, which absorbed much of the excess used-vehicle inventory. And throughout the year, buyers were enamored with the lightly used off-lease offerings, which kept retention values somewhat strong until late summer.
Compact & midsize used sedans in demand
For all the talk of trucks and SUVs, this was the year of the compact and midsize sedan. These segments have been beaten down in value over the past few years. This year, mainstream sedan segments saw a bounce up from the lows in the used market. On the other hand, consumer interest continued to subside in sedan segments in new sales. Affordability combined with marketing of used vehicles shifted the demand from new vehicles to used vehicles.
Segments such as luxury cars, subcompact luxury CUVs, and near-luxury cars saw depreciation on the higher end of the spectrum this year. These segments have high competition and slightly faltering buyer demand. Midsize cars depreciated at a 10-percent rate in the last 12 months, whereas luxury cars had 19-percent depreciation. That’s a 9-percentage-point gap. Usually, luxury cars depreciate about 3 to 5 percentage points higher than midsize cars.
Outlook for used vehicles
We see a healthy resale market currently. As prices on new vehicles inch higher, as well as rising interest rates adding pricing pressure to new-vehicle stickers, we believe demand for used vehicles will remain healthy for the foreseeable future. According to the Black Book Used Vehicle Retention Index, we saw the index increase in value for most months throughout 2018 due to the strong used market in 2018.
The year started off well with excess used inventory absorbed by the hurricanes late in 2017. After the tax cuts, the economy experienced unprecedented growth in the economy with GDP in Q2 rising 4.2 percent, and in Q3 by 3.5 percent; as well as more jobs added this year than in the previous two. Losses declined and as a result credit availability has been strong with low interest rates. OEMs have remained disciplined overall in incentive rates, currently hovering around 11 percent.
With limited growth in real income, affordability remained front and center driving demand higher for used cars. At the same time, franchise dealers really embraced marketing and selling of used cars, with some creating separately branded rooftops to capitalize on higher margins associated with selling used vehicles.
This has improved awareness of used vehicles overall, particularly off-lease, and has been an important contributor by dealers in keeping used values high. While margins for new vehicles have continued to decline this year, margins for used vehicles have improved. The stars were aligned perfectly to make this a banner year.
The used market may not be as strong as 2018, but should stay relatively stable in 2019.
Off-lease returns will be higher in 2019 by 300,000 totaling 4.2million. Overall demand is all driven by the economy which is expected to be strong but not as strong. Our residual models assume a GDP growth of 2.2 percent for base case, and lenders say that they are likely to tighten criteria next year.
Interest rates will be higher, which tilts the demand more in favor of the used market, particularly off-lease vehicles. In 2018, we are seeing annual depreciation rate trend at 12 percent while historically, we have seen in the past five years a range from 12 percent to 18 percent. In 2019, our forecast is 15 percent, which is about the average depreciation in recent years.
Anil Goyal is executive vice president of operations at Black Book.