Wholesale used-vehicle values ended the third-quarter with a record setting year-over-year increase in September and more increases are expected into next spring’s tax season, predict industry analysts.

The Manheim Used Vehicle Value Index stood at 204.8 in September, a 27.1 % increase over the September 2020 reading and 5.3% higher than the previous month. The index tracks wholesale used-vehicle prices adjusted for vehicle mix, mileage and time of year.

“The Manheim Index will see more gains before the end of the year which we anticipate will end up at 30% year-over-year in December,” said Cox Automotive chief economist Jonathan Smoke, during an Oct. 7 conference call.

“The odds of any price declines between now and the tax season next year is extremely low.”

He said used vehicles could once again become “naturally depreciating assets” in the back half of 2022 which is also when the industry expects to see improving new-car deliveries.

Many automakers drastically cut new-vehicle production this year as a result of a worldwide shortage of semi-conductor chips.

“The ultimate caveat here is the assumption that the production problems end up being behind us this quarter and (we) start to see gradual improvement,” Smoke added.

Manheim is a unit of Cox Automotive.

Late models are most impacted

Kevin Chartier, vice president of Manheim Consulting, and who was also on the conference call, said usually high used-vehicle prices are the result of the “demand transfer” from new vehicles to used vehicles, with late model, 1-to 4-year-old vehicles being most impacted.

“The dollar value increase has been systemic across all (vehicle) age groups with all but the oldest vehicles rising more than 25% since the beginning of January,” Chartier said.

Take 3-year-old vehicles, for example.

The values of those vehicles since January, rose and peaked (in May) before experiencing a normal seasonal downturn until early August, when it became apparent that the new-vehicle chip shortage was going to be worse than expected, he said.

That’s when the segment’s values took off again and reached new highs in September.

Chartier said value indexes for other vehicle segments, such as 1-year-old models, which are primarily retired rental vehicles, reflect the same record setting trend.

Given very tight new-vehicle availability and the limited number of rental vehicles that are being retired from service, Chartier expects the values of that “segment like all the other used-vehicle segments will remain elevated well above prior years at least through year-end.”

Conversion rate benefits sellers

Surges in used-vehicle values and demand have drastically reduced the number of used vehicles in auction supply channels and strong conversion rates indicate aggressive buying by dealers, the company said.

September’s 65% conversion rate was significantly higher than the 52% conversion rate in September 2019, Cox Automotive said.

“We no longer have balance but a tilted playing field that benefits sellers,” Smoke said of the conversion rate.

While the number of vehicles scheduled to come off lease is at record highs, the actual number of those vehicles making their way to the auction supply chain is at record lows, Chartier said.

“Normally, 60% or more of terminating (lease vehicles) find their way into the wholesale used vehicle market,” Chartier said.

“However, with today’s tremendous equity positions, the vast majority if these vehicles are being purchased at lease termination,” with only about 15 percent of “normal volume” winding up in auctions.

Given the shortage of new vehicles and the limited number of rental vehicles are being retired from service, Chartier expects the values of that “segment like all the other used vehicle segments will remain elevated well above prior years, at least through year-end.”

Also contributing to lower auction supplies is that vehicle loan default rates are near historic lows. That has reduced repossessed vehicle volume sent to auctions by a third when compared to “normal” levels seen prior to the onset of the pandemic, he added.

Downgraded new vehicle sales forecast

Cox Automotive downgraded its new-vehicle sales forecast for the full year to 15.5 million from 16.5 million it forecasted at the end of the second quarter.

“New-vehicle sales are at their lowest point for the year right now and we expect production and supply issues to slowly turn the corner late this year before seeing gradual improvement over the next year,” Smoke said.

Cox Automotive’s used-vehicle retail sales forecast for the full year is 21.4 million, supported by widely available credit, favorable terms, “super-attractive” rates, and consumers with enough cash to handle the higher prices or down payments, Smoke said.

Though used-vehicle retail demand is holding up better than new-vehicle retail demand, rising used-vehicle prices will produce modest slowing of the sales pace seen earlier in the year, he said.

An electrifying future

Also during the call, Manheim president Grace Huang provided an update of the company’s strategy to handle the influx of electric vehicle fleets it expects to see in the not so distant future.

Manheim and its recently acquired Spiers New Technologies, developed and are testing a battery health diagnostic tool in seven Manheim locations in California, Tennessee, Pennsylvania, Nevada and Washington, that handle high volumes of EVs and with six OEM clients, Huang said. Spiers New Technologies specializes in battery life management.

The tool has helped the companies create a battery score card which ranges from 1 to 5.

The score cards measure EV battery health and are being shared with EV buyers and sellers, Huang said. Vehicle batteries represent about 40% of an EV’s cost.

“We’ve found that EV batteries with vital score cards get roughly five times more views and bids than those that don’t and sell for values that are 1% to 4.5% higher,” she added.