Apparently used-vehicle price watchers came to Cox Automotive chief economist Tom Webb in great numbers with a good bit of confusion about reported trends so far this year.
As a result, Webb spent a good portion of his final quarterly conference call this past Friday explaining why the Manheim Used Vehicle Value Index showed only modest price softening earlier this year while other measurements — in particular the NADA Used Car Guide’s seasonally adjusted used-vehicle price index — fell for the eighth straight month and at much greater rate.
Adding fuel to Wall Street observers’ concerns was other finance companies and automakers recently stating that used-vehicle values softened by figures much greater than Manheim’s reading as well. Webb added a new slide to his quarterly presentation to show the Manheim Index and the one posted by NADA Used Car Guide actually moved along similar paths for more than four years.
“Everybody has asked me why the divergence from the Manheim Index? My short answer is that the indices are measuring very different things,” Webb said. “As such, the real question is not why they are diverging now but why did they track in the past?”
Webb went into deeper explanation of the two wholesale price reports, emphasizing that he couldn’t find NADA UCG’s “full explanation of methodology,” of how the team compiles its index. Webb did make a reference to the blog post NADA UCG offered here.
“But a couple of things are obvious,” Webb said. “They note that they are eliminating the effect of new-vehicle pricing increases for the most part. Thus, no upward drift over time unlike our index. Fair enough. But their history seems somewhat at odds with that.
“If their index is really measuring something akin to a residual performance index, then even after the collapse in February, their index reading of 110.1 would suggest that even current residual performance is stronger than at any point between August 1996 and July of 2010, according to their index,” he continued. “That seems somewhat hard to believe.
“Likewise their index peaked in May 2014, again somewhat odd. Everyone knows in 2011 was one of the strongest periods ever for used-vehicle pricing. Supplies were at an all-time low and retail demand was rapidly accelerating. Then to top everything off, we had the Japan earthquake in May, which had a very big impact on late-model used-vehicle pricing,” Webb went on to say.
“I might note that our index even with its inherent upward drift peaked in May 2011,” he added when the index hit 127.8.
Webb also was unsure why NADA UCG leveraged what he deemed to be expected depreciation and “normal seasonal patterns.” He acknowledged the depreciation component is an element federal officials at the Bureau of Labor Statistics use to compute the Consumer Price Index (CPI) for used vehicles
“As to quote expected or assumed seasonal patterns, why not use just a pure statistical routine? If you look at their February seasonals on their website, does it make any sense to average that? Clearly there is a trend that should be taken into consideration,” Webb said.
Webb also mentioned that NADA UCG limits its analysis to vehicles 8 years old and younger. He insisted the impact “is minimal” on the Manheim Index that has no age restriction.
“In February of this year, 27 percent of our sales were from the 2008 model year or earlier. Their actual impact on the index is far, far less than that given the substantially lower price point,” Webb said. “And furthermore generally speaking, older vehicles show more stability in pricing and in a direction that generally comports with the overall market.
“Again, I’m hampered by a lack of detail as to their methodology,” he continued. “I assume they’re using model-year designation as their measurement of age. But when do you throw out a whole model year from your sample? On Jan. 1? July 1? Or some traditional model year change over day in September or October? We don’t know.”
Webb closed the topic by emphasizing that his explanation was not intended to “denigrate their index.”
He added, “We are measuring different things. Each has its purpose and, of course, we have been totally transparent in what we are doing.”
Further price speculation
The differential between expert analyses of used-vehicle prices also triggered some professionals in the investment community to wonder if a “doomsday” scenario might be on the horizon. One call participant asked Webb if used-vehicle prices could drop by double digits in the coming months — perhaps even as much as 50 percent.
The concern also stemmed in part because wholesale supply is on the rise, too, sparked in part by off-lease units coming down the lanes.
Webb pointed out the most significant price decline came during the worst part of the Great Recession. That’s when the Manheim Index dropped below 100 for the first time since a couple of months after its inception in January 1995.
“The possibility of it happening just because of rising wholesale supply is pretty unlikely. Certainly it’s possible, but I just don’t see how some of these other scenarios play out, especially when you go to an extreme and say a 50-percent decline in used-vehicle values,” Webb said.
“How does that play out into everything else? I mean if used-vehicle prices decline by 50 percent, this industry is not going to sell any new vehicles,” Webb continued. “If you can get a very nice used vehicle for $30,000 and then get it for $15,000, people would flock to that market. It doesn’t in my mind comport with reality. There is always going to be some differential in play between the new- and the used-vehicle market just as there is a play between a 2-year-old vehicle and a 6-year-old vehicle. You’ve got to keep some relationship. They might widen or narrow depending on what’s going on, but there is going to be that relationship.
“New-vehicle prices are not going to go into free fall. So if you had a free fall in used-vehicle prices there would be a tremendous shift in terms of where people are buying, which in turn would drive used-vehicle prices back up,” Webb went on to say.