ATLANTA -

In explaining why the Manheim Used Vehicle Value Index slipped in September for the fourth month in a row, chief economist Tom Webb began his last conference call of the year by referencing a point he made earlier in 2011.

“On last quarter’s call I tried to dissuade you from the notion that record used-vehicle prices represented a bubble,” Webb told participants last Friday.

“Indeed, I suggested that a bubble as truly defined can never really develop in the wholesale market because there is no real speculation. There is no hoarding. There are no future contracts,” he continued.

“Without such forces and instruments, a marketplace that turns in a very short time period — about 30 days as we have with wholesale used vehicles — excesses will be cleared out before a bubble can develop,” Webb went on to say.

“What we have seen since May is a clearing out of some excesses or as I would call it a swing of pendulum back to equilibrium, not a bubble bursting,” he added.

Manheim determined wholesale used-vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) declined for the fourth consecutive month as September’s index reading came in at 122.9. Still, it represented a 3.4-percent increase from a year ago.

Webb acknowledged the decline in wholesale prices during the third quarter was the sharpest since the fourth quarter of 2008, a slide of about 2.5 percent. However, he insisted overall wholesale values today continue to be elevated by any reasonable historical measure.

“Mark that up to stronger retail demand despite the dismal economic backdrop and low wholesale supplies,” Webb stated.

Where Wholesale Supplies & Prices Could Be Going

Before sharing some projections on whether wholesale supply segments could change, Webb dialed back into past data to discuss off-rental, off-lease and repossession volumes.

Pointing out a peak of off-rental volume above 2 million units in 2005 and 2006 to a trough of 1.3 million units two years ago, Webb calculated that swing produced a 36-percent decline. Looking toward 2015, he conceded it might be a little too optimistic for off-rental volume to reach 1.7 million units. He believes 1.6 million is a better estimation.

“Like the economy, off-rental growth could be sluggish and sporadic,” Webb surmised.

When talking about off-lease volume, Webb recollected the heyday of 2002 when 3.4 million units comprised this segment of the wholesale market. But Webb thinks this segment should sink by 33 percent, or about 2.2 million, units by 2013 because of the decrease in leasing at franchised dealerships in 2009 and 2010. 

“Now in this instance, the forecast should be fairly accurate since most of it is based on deals that already have been written,” Webb stressed. “But I would remind you that these are total off-lease volumes. It is safe to assume the share to auction will shrink as a large portion will be bought by the grounding dealer or the lessee.

“The message here to dealers is quite clear: You want to be that grounding dealer,” he declared.

And in terms of repossession volume, Webb pointed out the time between the peak and the trough is going to be shorter with the high point being the 2009 mark of about 1.9 million units down to this year’s projected low of 1.3 million units. He thinks repo volume could climb back above 1.5 million by 2015 thanks to more loan originations and easier access to credit by borrowers with lower credit profiles.

“The securitization market is back open,” Webb said. “There were a large number of deals done in September. The cost of doing those deals is reasonable if allows for profit for the lenders and attractive rates for the consumer.”

No matter what these contributors to wholesale volume might do, Webb insisted current prices likely are in the neighborhood of where they will be a year or two from now.

In fact, Webb reiterated a conclusion during the conference call he has shared in other industry discussions, including a Webinar orchestrated by the Pre-Owned Automobile Dealers Alliance.

“What appears today to be abnormal pricing is in fact normal. And what was once considered normal, was in fact a period of abnormality,” he explained.

“I fully expect that the Manheim Index will show further easing in the near term,” Webb projected. “But by any reasonable historic standard, prices will remain high. More specifically, I wouldn’t be surprised if overall the Manheim Index tests the 120 level. But I would be surprised if it tests the 115 level.”

To back up these claims, he asked dealers and industry watchers to consider several questions.

—Is it more normal and better for dealers to have a 50 days’ supply of new vehicles in stock or the 70-plus days’ they held for much of the past decade?

—Is it more normal and better to sell 13 million units at a profit or 17 million units at a loss?

—Is it more normal and better for rental car companies to cycle units in one year or four months?

—Is it more normal and better to offer leasing only to customers who want to trade on a regular basis and avoid the residual risk, or use leasing to move product that can’t be retailed to customers who can’t get financed like we did in the past?

—Is it better to sell high quality high content small cars at a profit or turn out cheap vehicles just to meet CAFE standards?

“You get my point,” Webb continued. “Times there are a changing or have already changed, and I don’t think we’re silly enough to go back to the ways of the past.”

What Incentive Speculation Could Do to Residual Values

Also during the call, Auto Remarketing asked Webb to give his reaction to speculation that OEMs — especially Japanese automakers — might ramp up incentives during the fourth quarter to meet sales goals curtailed because of March’s natural disasters.

Webb responded by saying he doesn’t expect a price war to break out, stressing the Japanese nameplates don’t want to be put into that situation and the entire industry behaves differently now than before the recession.

“People are a lot smarter than they were in the past. They’ll put on some big incentives if they think it will boost the sales rate. But I don’t think a big boost in incentives will boost the sales rate that much given the economic backdrop,” Webb explained.

“It might be more advantageous if we get out of the doldrums to use some of that incentive money periodically during the first part of next year where it will probably give you more bang for the buck,” he suggested.

“Even if you have a tremendous run-up in incentives, it will not have as big of an impact on residuals as it had in the past because of that lack of wholesale supply,” Webb pointed out. “The normal transmission mechanism for those incentive activities to hurt used-vehicle value is on late-model used vehicles. Well, there aren’t a lot of late-model used vehicles being sold at auction.”

More on September Price Movement

As the index reading showed prices are still 3.4 percent higher than September of last year, two vehicle segments are providing nearly all of the fuel for that rise.

Manheim noticed compact car prices still climbed 9.2 percent year-over-year last month, while midsize car prices increased at almost the same level — 8.1 percent.

Two segments moved up just little last month as Manheim said vans ticked up 0.7 percent and luxury cars edged 0.2 percent higher.

Manheim spotted just a 0.7-percent decline for trucks, and Webb explained why.

After pointing out the September new-vehicle sales rate hit 13 million, Webb indicated a significant portion of the sales gain was the result of attractive incentives being used to pare down the inventory level of new pickup trucks.

“Despite the incentive activity, wholesale valuations for used pickups outperformed the overall market in September,” he noted. “Attribute that to the lack of supply of late-model units. With fewer two- and three-year-old pickups being offered in the wholesale market, the normal transmission mechanism by which incentives depress residuals was disrupted.”

The other vehicle segment that showed a price decline last month was SUVs. Their prices sunk 4.9 percent year-over-year last.

Finally, Manheim said end-of-service fleet units were scarce at auction in September.

“Average pricing for these units remained well above year-ago levels, despite the vehicles’ having higher mileage,” Webb stated. “As is typical this time of year, the pickups and cargo vans being sold by commercial fleets had a significant increase in average mileage.”