Customers in a CarMax lot in Maryland browser for deals. Photo credit: BLOOMBERG
Analysts say the industry has absorbed the growing glut of returning off-lease vehicles well, even as used-vehicle prices soften.
Whether the industry is able to sustain that through the rest of the year remains to be seen.
The three top indicators of used-vehicle pricing and residual values — the Manheim Used Vehicle Value Index, the Black Book Wholesale Used Vehicle Retention Index and J.D. Power's Used Vehicle Price Index — showed signs of stability in the second quarter.
The J.D. Power index was flat month over month at 111.1 points in June. While that is 7.6 percent lower than a year earlier, it follows a monthly rise in May — the first time the index measured an increase in a year.
Likewise, Black Book's index ticked up 0.6 percent in June to 113 points, its second rise in three months. The Manheim index, which has shown consistently higher readings than its counterparts over the past year, hit a record high for the second consecutive month.
Kontos: Vigorous market surprising
'Gradual'
"It's been a bit of a stronger market to this point than one would expect," said Tom Kontos, chief economist at ADESA Analytical Services.
The market was bolstered in June by a dip in gasoline prices and an economy that remained strong, giving potential buyers confidence to buy used vehicles. At the same time, the market has been able to absorb growing off-lease returns.
"I hear tsunami and flood bandied about, but I don't take that as what we're seeing," Kontos said. "It's been gradual, something incremental that the industry can absorb."
Smoke: Demand boosts prices
Jonathan Smoke, chief economist at Cox Automotive, said in a note accompanying the release of the latest Manheim index report that "strong" demand for used vehicles has kept prices higher than what many had anticipated. His comments echo those of NADA Chief Economist Steven Szakaly, who said during a July briefing he anticipates 200,000 new-vehicle buyers moving into the used-vehicle market over the remainder of the year.
"Strong retail demand for recent model year used vehicles is encouraging dealers to buy more vehicles from auction heading into the summer," Smoke wrote. "The increased demand is more than offsetting the higher supply."
That's a trend that could be bolstered by more crossovers and SUVs, dominant in the new-car market over the past two years, returning to market.
"We're starting to see the SUVs that were sold three years ago come back in good numbers now," Kontos said. "The further we go into the future, the more we're going to see the kinds of vehicles that have been popular more recently. But up till this point, we've had a disproportionate supply of small cars. As we move forward, that will reverse."
Challenges
Still, the used-vehicle market faces significant challenges throughout the remainder of the year and heading into 2018.
For starters, the number of off-lease vehicles returning to market will continue to rise, putting more downward pressure on pricing. Szakaly said he anticipates an acceleration in vehicle-price depreciation throughout the second half of the year and into early 2018, when large numbers of fleet vehicles will enter the market.
"As we move on through the rest of this year, used cars will be increasingly challenging," he said.
Anil Goyal, analyst at Black Book, said he anticipates the Black Book index will fall about 6 percent by the end of the year from the year-earlier level, due in large part to manufacturers' keeping production levels high.
"That means as the late 2018 model years come around, there will be more incentives to be kicked in," putting further pressure on used-vehicle prices, Goyal said.
His chief concern with the market comes from lenders tightening credit, particularly to subprime customers who are more inclined to buy used vehicles. Lenders are tightening their credit criteria in response to rising delinquency rates.
"As lenders try to take that criteria and tighten them, they're taking some buyers out of the market," Goyal said.
Steady as she goes
| 3 major indexes of used-vehicle pricing showed stability over the course of the 2nd quarter. | |
| Manheim Used Vehicle Value Index | |
| March | 124.1 |
| June | 129.3 |
| J.D. Power Valuation Services Used Vehicle Price Index | |
| March | 110.1 |
| June | 111.1 |
| Black Book Wholesale Used Vehicle Retention Index | |
| March | 113 |
| June | 113 |
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