In the latest installment of the annual Power 300 issue of Auto Remarketing, we go behind the scenes with some of the leading companies in the used-car space and their top executives with a few Q&A features.
Next up is Jonathan Banks, vice president and general manager of vehicle valuations at J.D. Power.
Auto Remarketing: More than halfway through the year, is the used-car retail market as strong as you expected at beginning of 2019? What’s driving that?
Jonathan Banks: The used-car market performed very strong over the first half of 2019. Through June, used -vehicle prices are on average 2.1% greater than during the same six-month period in 2018. In terms of individual segment performances, mainstream passenger car price gains have outpaced their SUV counterparts. More “affordable” small, compact and midsize car segment prices have increased by a range of 5.2% to 9.5% through June compared to the same period in 2018.
Mainstream SUV segment prices have also increased, however not nearly to the same degree as passenger cars. The primary driver behind this is because of higher levels of 0-5-year-old SUV supply returning to the market. As for the luxury side of the market, premium segment prices are down across the board between 1.6% to 6.2% and are also feeling the pressure of elevated levels of 0-5-year-old wholesale volume returning to the market.
These results are surprising both from an industry and segment standpoint.
Jonathan Banks, J.D. Power
J.D. Power estimated that the used market would experience a moderate decline in 2019 due to increased used supply, increased interest rates, tighter credit conditions and pressure from new vehicle incentives due to a slowdown in new retail sales. Several of these variables surprised us with interest rates and incentive spending remaining relatively flat to slightly down. These factors coupled with a continuation of used vehicle demand that we witnessed in 2018 resulted in used -price performance that will end up slightly outperforming 2018.
From a segment standpoint, J.D. Power has been talking about the importance affordability has on the purchase decision for a lot of consumers either entering the market due to stable employment circumstances or from younger consumers entering the market. Our data has shown that younger buyers are gravitating towards economical vehicle choices, which we believe is one of the primary drivers of the large price increases for smaller car segments.
There is also a dramatic increase in demand from franchise dealers who are now selling more used cars then ever before. This demand is accelerated even further by new digital retail and ride-sharing companies, which both are accretive to the historical used-car retailers.
AR: Does the increasing retail price gap between new and used vehicles alarm you? Why/why not?
JB: The price gap itself is not alarming; in the past, we’ve seen manufacturers increase incentive spending to sell new units, we are in a time now where they are being more strategic with production and incentives.
This is a good thing as it ultimately helps preserve used retention down the road. If anything, this gap is a good thing for the industry and is a more sustainable approach to the market compared to increasing incentives. We have seen used -retail prices increase faster than new prices, so expect used-vehicle price growth to slow down soon.
The by-product of the growing retail price gap between new and used cars is a shift in demand from new to used cars for many buyers. Clean late-model used units are great alternatives, as they offer much of the same technology and features as new vehicles at a fraction of the cost. Importantly, J.D. Power’s quality metrics measuring initial quality (IQS) and longer-term dependability (VDS) indicate that manufacturers are building some of the best vehicles we have ever seen. This means consumers who may be on the fence between new and used can buy a used vehicle and be confident they will have a good experience.
Franchised dealers are enjoying selling used cars as well. Top publicly traded dealer groups in the U.S. have been vocal about expanding used- vehicle operations and have sold a record number of used vehicles. In fact, J.D. Power tracks used- and new -vehicle sales at franchised dealers, so far this year the used-to-new ratio has averaged 103%, up from 93% during the same period in 2018 — this means that franchise dealers are selling slightly more used vehicle than new on average. Slowing new-vehicle sales have also help shift franchised dealer focus from new to used.
All these factors combined don’t set off alarm bells, but instead presents a huge opportunity for the industry to leverage the demand for used vehicles. There is no surprise that we are seeing innovative ways to capitalize on this opportunity. We have also witnessed some bullish expectations and investments for companies that have created solutions to tap into the used-car market’s potential.
AR: On the wholesale sale side, how long do you think the pricing strength will remain, or is this the peak year?
JB: We expect a mild decline in used prices, which barring any serious economic changes or a dramatic shift in new-vehicle incentive strategies should last for several years.
J.D. Power’s forecast expects wholesale prices for used units up to 8 years old increase by around 0.5% to 1% in 2019 relative to 2018, level off in 2020 and decline slightly in 2021. At the segment level, mainstream passenger car prices are expected to be the strongest through the remainder of 2019. For example, compact and midsize car prices are expected to increase by 4.4% and 3.6%, respectively.
This will be driven by lower supply, especially now with manufacturers discontinuing or cutting back new-vehicle production on these models coupled with continued demand for cost-conscious consumers. Mainstream SUV prices are also expected to remain positive, compact SUV prices are forecast to increase by a slight 0.3% while midsize SUV prices should grow by 1.5%. SUV prices will continue to be suppressed by increasing levels of supply coming back to the market. Amplified by increasing levels of used supply, all premium segments are expected to experience declines in 2019 ranging between 3.6% for compact premium SUV to 5.6% for midsize premium car.
AR: What are you noticing in terms of wholesale volumes — up/down this year, and how are they being distributed?
JB: Through June, wholesale volume for units up to 5 years in age stands 5.2% greater than the same six-month period in 2018. On the new side of the market roughly 70% of vehicles sold are truck, SUV, or van models while only 30% are passenger cars.
Because of this trend, we are seeing increasing levels of trucks, SUVs and vans enter the wholesale marketplace. In terms of share, in 2019, 52% of wholesale volume has been truck, SUV or van, while 48% has been passenger cars. SUV segments have experienced the biggest changes this year, midsize pickup volume has increased by 32% compared to the same period in 2018, compact SUV volume has grown by nearly 26% and midsize SUV volume is up 14%.