After mentioning the latest movement of the Manheim Used Vehicle Value Index during his quarterly conference call on Wednesday, Cox Automotive chief economist Tom Webb touched on a topic that triggers the greatest volume of questions he receives — wholesale price projections.
While Webb didn’t offer any specific figures, he did share some guidance in an attempt to give dealers and finance companies some useful perspective.
“As of late, I’ve been asked numerous times about my opinion about those forecasts calling for a steep decline in wholesale pricing,” Webb said told the call full of Wall Street analysts and the media. “My response is that an increase in supply alone is not enough to cause a collapse in pricing. It would have to be accompanied by weaker retail demand.
“As such, I think models that have a collapse in wholesale pricing for used vehicles but still suggest new-vehicle sales in the 17-plus million range are eternally inconsistent,” he continued.
That 30-second soundbite only seemed to trigger industry observers to ask Webb to offer more forward-looking details. The inquires arrived in light of the Manheim Used Vehicle Value Index — a measure of wholesale prices adjusted for mix, mileage and season — that came in with a reading of 123.9 in June, representing a virtually unchanged mark, as it represented just a 0.1-percent decline from a year ago.
So Webb obliged later in Wednesday’s nearly hour-long call by elaborating on his previous point.
“In terms of the downward pressure, we know there is going to be an increase — and a fairly significant increase — in wholesale supplies in the years going forward with much of that being driven by the off-lease volumes,” said Webb, who thinks off-lease volume could be between 3.5 million and 4 million units by the end of 2018.
“These are vehicles that really have to be sold back into the market,” he continued. “It’s just a matter of what price is going to achieve the equilibrium that you need because these vehicles have to come back in the market. They have to be wholesaled and subsequently retailed again in relatively short order so pricing is a mechanism that adjusts that.
“If you’re measuring wholesale prices as we do in the index, historically it shows relative modest movement,” Webb added. “To say that prices will fall 5 percent next year and 5 percent the year following, that would be a big movement down. The history of the pricing suggests you only get big movements like that when it’s not only wholesale supplies going up but that retail demand is weakening either because of tighter credit conditions or an overall softening in the economy like the recession. That’s what we’ve had in the past.”
Webb closed his thought by reiterating his previously mentioned point about how new cars and light-duty trucks sold at a seasonally adjusted annual rate (SAAR) of 17.1 million in June, down from a 17.7 million pace in May a month he said was boosted by “several calendar quirks,” according to the Cox Automotive expert.
“If you’re looking for back-to-back declines of 5 percent in wholesale pricing as we measure it … it doesn’t mean it’s not going to happen. It certainly would be outside the norms,” Webb said.
More details of latest index reading
Manheim noticed wholesale used-vehicle prices inched up in June after four consecutive months of decline, but Webb indicated the latest reading settled in line with expectations.
“With no surprises and pricing that is in line with analyst expectations, it’s been business as usual for the used-vehicle market in the second quarter,” Webb said.
“With pricing nearly identical to last year at this time, consumers continue to see the value in purchasing used vehicles, which remain a profitable part of a dealer's business,” he continued.
With stable job growth and attractive financing continuing for the retail market for new and used vehicles, Manheim found that the strongest pricing tiers were everything above $15,000. Continuing the trend of weakness, the company also noted vehicles in the $9,000-$11,000 range also showed a significant increase in volume of vehicles offered.
Second quarter wholesale pricing for vehicle segments included:
— Compact-car prices softened 7.2 percent in June relative to a year ago, and once again continued to be the weakest segment.
— Midsize cars remains one of the weaker segments and was also down relative to last year, but saw a much more modest decrease of 0.8 percent.
— Luxury car values fell 0.4 percent over the past year. “Despite a good June, this class continued to underperform the overall market, and within that segment, entry luxury cars remain under the greatest price pressure,” Webb said.
— Pickups and vans once again won the top spot for the strongest vehicle segment with pickups up 6.7 percent and vans up 2.7 percent on a year-over-year basis. Within the van segment, full-size commercial passenger units and cargo vans were especially strong thanks in part to limited inventory.
— SUV and CUV remained virtually identical to the same period a year ago, with a slight decrease of 0.3 percent.
Webb pointed out that it’s expected that the publicly traded dealership groups will show strong vehicle operations when they report their second quarter results. He added that also illustrating the industry's strength, certified pre-owned sales continued their record pace, with sales up 17.6 percent in June and 12.5 percent for the first half of 2015.
“The pricing strength is a testament to solid retail markets, good remarketing practices and greater operating efficiencies,” Webb said.
“While current wholesale pricing is now in line with historic normalcies and market fundamentals, a further acceleration of wholesale inventory combined with seasonal headwinds will likely mean we’ll see price declines,” he went on to say.