FirstLook Market Alert Update - June 18, 2020

June 18, 2020

As the Covid-19 lockdowns lift around the country it is time to update our FirstLook Market Alert on pre-owned vehicle values. Here are the major headlines:

  1. “We’re back!” As states open across the country we are seeing people emerge with savings from two months of being holed up at home (along with canceled vacation savings) and are catching up on their spending.
  2. Pre-owned sales came back in May and continue in June.
    (May sales were up 6% year over year nationally)
  3. The federal Payroll Protection Program started in late April lifting employment rolls from modern record lows.
  4. Stimulus checks did what they were designed to do - drive spending.
  5. “The most common down payment last month was $1,200”
  6. Factories’ struggles to ramp up production are dampening new vehicle sales which further boosted used vehicle sales and values.
  7. Despite being the world’s leading manufacturing industry, automakers have generally struggled to ramp production back up as quickly as other industries.
  8. Auto auctions have been slow to ramp up backend operations which has limited supply.
  9. "We still got this bottleneck that's happening, where the auctions are not back to full staff," Laura Wehunt, vice president of vehicle valuations at Black Book told Automotive News. This means vehicles are sometimes not getting checked in, reconditioned and posted for sale as quickly as they normally would.
  10. Economists big worry is what happens when the stimulus and supplemental unemployment benefits “steroids wear off” later this summer.
  11. The Fed Chairman has cautioned Congress that they do not expect employment to bounce back fully as many laid off employees will not be recalled and will be unable to find work in their industry as companies use the crisis to get lean permanently.
  12. Bottom Line: The recession looks more likely to be mild instead of severe - make the most of the post-lockdown boom but don’t assume that the rest of the year will look like June unless another massive stimulus is passed in the coming weeks.

  13. “The other shoe hasn’t dropped yet.” Auto finance companies artfully dodged a bullet this spring by aggressively extending leases (so aggressively that more than a dozen attorney generals admonished them). This allowed them to push off the major off-lease overhang until markets opened up again.
  14. 560,000 additional lease returns have been pushed into the second half of the year along with 250,000 rental cars continuing to be liquidated, moving price pressure from the Spring into the later Summer/Fall.
  15. Institutional remarketers have been very disciplined in liquidating their inventories and have taken advantage of the struggles of new car factories to limit the damage to vehicle values.
  16. Bottom Line: The result is that the decline in pre-owned vehicle values, forecast to bottom out at an average of -10% to -12% in our mild recession scenario, is mostly ahead of us.
  17. As Tom Kontos chief economist at KAR Global told Automotive News: "We really haven't dealt with the supply that's out there yet.” The likely influx of vehicles, coupled with economic uncertainty, is why industry observers foresee a period of volatility this summer and fall. While the rebound in retail sales already happening should help offset the disruption, uncertainty abounds. Many millions of Americans are still out of work, and increased unemployment benefits put in place because of the pandemic are set to end in July.
  18. Black Book echoed a similar sentiment in its latest analysis: “At the same time, we expect a large, incremental influx of used inventory to hit the marketplace over the next six months, coming from prolonged lease return delays, downsizing of rental fleets (including the expected sell-off of a large number of Hertz’s units), increased repossessions, and un-sold inventory from the March-May time period.”

  19. The impact will vary significantly by segment. Given the complex dynamics at work, the impact of the drop in values will vary dramatically. For example:
  20. Pickup trucks will generally hold value.
  21. Last month SUVs, Crossovers and Light Pickup Trucks represented 78% of vehicles sold vs 65% two years ago and 71% at the beginning of this year.
  22. This is driven by low fuel prices and lower interest rates.
  23. Light pickup truck prices are not going to get better for a while given the shortage of used supply (they aren’t common in rental fleets and were a lower portion of sales in 2017 when current lease returns were originally sold). Until factories ramp up enough production of new pickup trucks to make up the gap, the used market will be tight.
  24. The values of sedans and other passenger cars are likely to be hit harder.
  25. With all passenger cars only representing 22% of recent new sales, there is a significant excess of supply of these vehicles in rental car liquidations and the 2017s returning off-lease which will pressure prices down as these vehicles hit the wholesale market later this summer and fall.
  26. This was the first time that pickup trucks surpassed cars in market share and reflects the long evolving move towards SUV/Crossovers and Pickup Trucks reaching shocking new heights.
  27. For the latest forecasts check out your FirstLook Pricing Alerts or our price forecasting dashboard.

The Path Ahead: Remain flexible as conditions change. Keep an eye on the auctions, changing new car supply and consumer demand as the stimulus wears off. You know your market and customers better than anyone. Remain disciplined and use all the market data available, paired with your sales data and local understanding to help your dealership perform well in these turbulent times.