CARY, N.C. -

EDITOR'S NOTE: This is a preview excerpt, available only to CMG Premium members, from the July issue of Auto Remarketing, which will provide a “Mid-Year Report” on various segments of the industry.

In addition to the piece below on used-car prices, the magazine will also provide updates on the retail sales, finance, repossession/collections and buy-here, pay-here segments of the used-car market.

Wholesale vehicle prices were approaching the midpoint of the year hitting record after record after record high.

As this story will discuss, twin forces of a “perfect storm” in high used-car demand and a “perfect drought” of used-car supply — the latter amplified by a microchip shortage this year — has led to all-time (and often baffling) highs in used-car prices.

The respective wholesale prices indices at Black Book and Manheim each posted four straight months of all-time highs (February through May). And not long after Black Book reported its latest record reading, Black Book said in weekly Market Insights  report recapping the week ending June 12:

“With so many newer used units selling at or above their respective new MSRP,” Black Book analysts began in that report, “the industry continues to question where the ceiling is, or if there is one?

“Unfortunately for buyers, the ceiling was not found this week,” they continued. “Instead, it was another strong week for wholesale values, which makes it 20 consecutive weeks of gains.”

Meantime, in May, the Manheim Used Vehicle Value Index, which hit the 200 mark for the first time ever, spokespeople with parent company Cox Automotive confirmed.

The index reading for May was 203.0, which beat year-ago figures by 48.2%.

To put that in a more granular perspective, Black Book’s mid-June installment of Market Insights showed how dealerships now are paying nearly $27,000 for a piece of inventory that cost just $20,000 at the beginning of the year.

And there’s little evidence to refute the notion that the same unit might approach $30,000 soon stemming from the current pace of wholesale price increases.

But let's take a broader look at the magnitude of the increasing price of used cars. 

According to U.S. Bureau of Labor Statistics, there was a 0.6% month-over-month uptick in the Consumer Price Index for All Urban Consumers. That includes everythign from energy, commodities, food, apparel and much more. 

But the price of used vehicles climbed 7.3% month-over-month in May.

“This increase accounted for about one-third of the seasonally adjusted all items increase,” BLS said in a release. 

On an adjusted basis, the price of used cars had climbed 29.7% year-over-year as of the end of May, according to BLS.

And going back to the breaking records, KAR Global chief economist Tom Kontos noticed this one in the April/May edition of his Kontos Kommentary. 

“Average wholesale used vehicle prices cracked the $14,000-mark for the first time ever in April and then proceeded to set new highs above $15,000 in May. This is the latest sign of the seemingly never-ending rise in wholesale values resulting from a deluge in demand and a drought in supply,” Kontos said.

In an earlier edition of the report, he noted, that “perfect storm in used vehicle demand faces a perfect drought in used vehicle supply.”

In episode of the Auto Remarketing Podcast, he elaborated on the rain-themed metaphors to illustrate the current state of used-car prices.

“I thought the perfect storm analogy that people use a lot of these days is great for describing the demand situation in the used-car market. Because we got the traditional shifts from new to used. There’s always an emphasis on used-car operations by dealers and by the public buying vehicles during tough times, to go more heavily into the used-car space than the new-car space.”

However, that’s just one element of this “perfect storm.”

“But you add chip shortages, you add government stimulus, you add the fact that we’ve got high savings rates right now from people being idle in some ways in terms of their spending, at least. And so that’s leading to a pretty perfect storm on the demand side.

“But I feel like a better phrase for what’s happening on the supply side is a ‘perfect drought,’ because the rental cars that we would normally see around the end of spring break and that time of year, we didn’t see an influx of rental car volume because last year at this time, there was a lot of idle rental car volume, and that remained so for much of the year. There was a lot of downsizing in the rental fleets,” he said.

With rental vehicles staying in operation typically 18 months, those haven’t made their way into the wholesale channels, Kontos said.

He also pointed to a drop in off-lease volume, and noted that many consumers are choosing to buy the vehicle at lease-end due to the residual value position being lower than what the current market value of a vehicle would be.  Not to mention, with less driving done over the past year, the mileage on lease turn-ins are more favorable, giving the consumer an even stronger position on the residual.

According to the latest quarterly report from RVI Analytics, there was a 1.8% year-over-year drop in off-lease volume during April, and further softening is expected.

“Given the low supply of new vehicles as a consequence of the COVID-19 shutdowns and most recently the chip shortage, we are expecting the off-lease supply index to decline over the next year,” the firm said in its report.

The RVI Lease Supply Index for 2021 is expected to drop 6.5% from 2020. The firm is projecting year-over-year drops of 9.0% and 10.6% in 2022 and 2023, respectively.

Then, gains of 5.1% and 17.3% are projected for 2024 and 2025, respectively.

In its recently updated 2021 Market Insights & Outlook report, Cox Automotive looked at the “wholesale inflow” volumes by various channels, including off-lease.

In 2018, there were 3.9 million off-lease units. That climbed to 4.1 million in 2019, then hit 4.1 million again in 2020. For this year, that’s expected to decline to 4.0 million, according to the Cox report.

“This is the beginning of a decline in off-lease volume that will contribute to supply constraints within the used market for franchised dealers in 2021,” analysts said.

Looking at another volume piece, KAR Global’s Kontos also mention that repo volumes are “idle” as many consumers are benefitting from government stimulus programs or forbearance or deferral programs from lenders.

“When you put the two together,” Kontos said, referring to the supply and demand dynamics, “what do you get? High prices.”

Nick Zulovich contributed to this report.