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Thursday, January 7, 2010

It’s Unanimous!

Pre-Owned values will continue to rise as supply shrinks.

Early 2010 pronouncements by industry experts bear out what economists close to the industry have been predicting since the fall of 2008. With consumers keeping their present vehicles longer, and fleets and rentals putting off or reducing purchases, there are fewer vehicles coming back into the pre-owned market. In addition, the lack of leasing in the last 18 – 24 months means there are thousands fewer lease returns available. Add it all up, and the industry is looking at an extreme pre-owned shortage.
Edmunds.com analysts project that “the used-vehicle price strength of 2009 — caused largely by low inventory levels and healthy demand — will likely continue into 2010 thanks to "tight" supply and sustained demand.”
According to NADA, “about 8 million fewer used cars and trucks entered the U.S. market over the past two years, resulting in higher used-vehicle prices every month in 2009.” NADA is alone in expecting the pre-owned shortage to ease somewhat in 2010, predicting an additional 1 million vehicles traded in to dealerships in 2010 because of higher new vehicle volume. In my mind, this increase is not enough to make up for the loss of Cash for Clunker vehicles and the absence of tens of thousands of “off lease” and rental vehicles. If financing becomes available and fleet and daily rental companies replace large numbers of vehicles, there could be additional pre-owned inventory available. However, these will be much higher mileage units than ever before for each category due to the fact they have been kept in service so much longer than in previous years.
OpenLane predicts strong demand will drive wholesale market throughout 2010. “Reduction in trade-ins and overall sluggish new-vehicle market will be the primary wholesale demand drivers.”
ADESA's Tom Kontos has indicated that wholesale prices should continue to show "stable-to-firming" trends in the near future, saying that "although auction inventories are rising a bit — mostly from returns of off-rental units that normally occur earlier in the fall — supplies remain tight." Kontos’ conclusion? "Coupled with improving vehicle demand, this should keep wholesale prices in a stable-to-firming pattern through year-end and into 2010."
Ricky Beggs, Vice President and Managing Editor of Black Book, says, “Used vehicle values in 2009 showed mostly strength, and when looking at year-over-year levels showed some huge gains, even when the vehicles had significantly more miles on them.
Some of the same circumstances that helped used vehicles maintain their strength in values are still present and are part of the equation for 2010 and beyond. Due to much lower levels of new vehicle sales for the past two years, the number of used cars in the market place is greatly reduced. Daily rental units being turned in are also at lower levels, and are expected to be similar to the 2009 numbers.”
Eric Ibara, Director of Residual Value Consulting for Kelly Blue Book says, “While tightening supply will undoubtedly impact used car prices over the next few years, its effect will not be uniform or consistent throughout all segments and at all times. Some segments will benefit more from the reduction in daily rental volume. Obviously, manufacturers scaled back on fleet and lease volume to varying degrees, and the impact on their models will be in proportion to their actions. Late-model used car prices are also subject to new-vehicle transaction prices, but with the downturn in auto sales, many manufacturers took out production capacity, sometimes on a permanent basis. To this end, there should be less downward pressure coming from high new-car incentives, but again, the effect will vary from segment to segment and by brand.”
RVI Group predicts a “4 year pre-owned price climb.” For those who don’t know, RVI stands for Residual Value Insurance. These folks put their money where their mouth is as they guarantee virtually all insured residual values in the country. According to Rene Abdalah, Vice President of RVI Group, "We expect the year-over-year upswing in used prices to reach a peak of 13-percent in 2012 before starting to stabilize.”
What does all this mean? The sky is not the limit on pre-owned values. The MSRP and transaction price of a like model new vehicle places somewhat of a cap on pre-owned values. Lower OEM rebates and incentives could provide room for pre-owned prices to move even higher. The higher values caused by the shortage might somewhat improve consumers’ equity or negative equity positions in their current vehicles. But the biggest issue is supply.
I’m with RVI on this one. The shortage won’t be over in a matter of months. It will be years before we reach stability. Even if there is a supply of available pre-owned vehicles, the quantity with reasonable miles will be few. What can a dealer do?
If the dealer is a Ford Lincoln Mercury dealer, the OEM is helping out. The recent 27 month leases offered means dealers will have a supply of lease returns coming soon. If ever the market needed “Half-a-Car” and short- term principles it is now if only to supply pre-owned vehicles through lease returns. Eustace Wolfington, where are you? Wolfington and “Half-a-Car” proved the short-term theory back in the late 1980s and into the 90’s in an era where there was no pre-owned inventory shortage. If anything, this era was marked by over production of new vehicles and over saturation of rental and other program units by the OEMs, something they have vowed to eschew this time around.
Dealers who don’t have access to short-term residual based financing through their OEM should look to local credit unions. There are hundreds of credit unions across the country offering residual based financing and/or leasing.
Savvy dealers understand that the monthly payment drops $35. - $50. per month for every thousand dollars of trade equity or money down on a short-term lease or balloon. This means using the rebate or dealer incentive on a short-term lease or balloon, in lieu of a subvented long-term interest rate offers, can offer a surprisingly low monthly payment. If the consumer has additional down payment and/or trade equity, the payment/profit balance gets even better. Everybody wins and the dealer has a shot at the off lease vehicle at the end of term, as well as the opportunity to do business with the buyer again.
The pre-owned inventory shortage will be with us for a while. Why not take some measures to mitigate its impact on your business?


by David Ruggles
Written for Auto Finance News, January 2010