Kontos Explains May Wholesale Price Dip & Sees Potential Source of More Supply Later This Year

May’s slight downward movement of wholesale vehicle prices is what ADESA’s Tom Kontos has been expecting.

ADESA Analytical Services indicated that wholesale used-vehicle prices in May averaged $10,460, a figure that was down 1.1 percent compared to April and 0.8 percent lower than May of last year.

“I’ve been saying in my commentary for several months that I viewed the market as already having peaked and that we’re off the peak by at a very minimal level,” Kontos told Auto Remarketing on Wednesday.

“I don’t overdramatize the fact that we’ve passed the peak because I don’t see used-car prices falling off a cliff,” Kontos added.

He explained that he expected some overall price softening for two reasons. One, the spring market has now gone by with the passing of income tax refund season as well as the reduction of “new- and used-car fever” in March, April and May.

“That’s when people want to get a car more significantly than any other time of the year,” Kontos insisted.

Furthermore, the ADESA economist touched on how used-vehicle prices have approached the level of new models. Kontos referred back to his reference point that typically used prices hit a ceiling when they reach 60 percent of what a new unit might fetch.

Kontos also pondered whether the May wholesale price retreat would have been a little more noticeable had the natural disasters in Japan not occurred back in March, creating a ripple effect through all segments of the auto industry.

“With the uncertainty in supply of new vehicles, that created just a little bit more headroom for those prices to stay high and even climb a notch higher than they would have otherwise,” Kontos offered. “I think that’s what may be delayed whatever moderating in used-car prices we’re seeing now. We might have seen it earlier in the cycle absent the situation in Japan that led to supply disruptions.

“With tight supply of used cars, there’s not going to be a significant drop in price. But I think we have reached a natural peak in the cycle,” Kontos went on to say.

Compacts Rise Again, While Full-Size SUVs and Pickups Slump

As dealers have readily seen, ADESA determined that on a year-over-year basis, prices were strongest for compact cars (up 14.7 percent) and weakest for full-size SUVs (down 12.9 percent) and full-size pickups (down 13.4 percent).

Since movements by these segments are reminiscent of 2008, Auto Remarketing asked Kontos to compare the current situation to the one from three years ago. While acknowledging the overall price changes, he pointed out what he believes to be numerous differences.

“In 2008, a lot of run up in fuel prices was driven by uncertainty in the global economy on an unprecedented scale. There is still uncertainty today but not to the scale it was back in 2008 when the credit markets absolutely froze and we had the too-big-to-fail failures of Bear Stearns and Lehman Brothers,” Kontos recollected.

“Those wild swings in fuel prices in a six-month period — I don’t think — are what we’re faced with today. I think today we’re facing a global economic recovery especially in China. That’s what’s driving fuel demand,” he continued.

A report from the U.S. Energy Information Administration reinforced Kontos’ stance. Federal officials stated the annual average regular-grade gasoline retail price to be $3.60 per gallon in 2011 and $3.67 per gallon in 2012.

So what does that mean for the wholesale prospects of full-size SUVs and pickups?

“In 2008, the supply of pickup trucks and SUVs was much higher than what it is today,” Kontos responded. “As people have substituted away from those models, the availability of full-size SUVs and pickups is much less likely today than it was back in ’08 when there was simply a lot more of those vehicles floating around in the market.

“The people who actually need pickup trucks and full-size SUVs today are the ones actually buying them,” he added.

More May Data Points

ADESA also discovered manufacturers registered a 0.9 percent month-over-month price decrease in May and an 11.1-percent year-over-year rise. The auction company also said fleet/lease consignors experienced a 1.4-percent sequential price decrease and a 1.3 percent annual increase.

Moreover, ADESA indicated dealer consignors saw a 0.1-percent average price decrease versus April and an 8.4 percent uptick versus May of last year.
ADESA Analytical Services estimated that auction industry inventory levels stood at 24 days at month-end compared to 30 days last May as used vehicle supply remains tight.

Based on data from CNW Research, Kontos mentioned retail used-vehicle sales in May were up 2.8 percent year-over-year for franchised dealers, but down 4.4 percent for independent stores.

However, as Auto Remarketing also reported, Kontos highlighted that on a month-over-month basis used vehicle sales rose by about 10 percent for both groups.

Also as previously highlighted by Auto Remarketing, Kontos cited Autodata’s information that mentioned May’s certified pre-owned vehicle sales slid 7.2 percent versus April and 3.0 percent compared to the same month in 2010.

Could Off-Rental Units Boost Supply Later This Year?

In wrapping up his commentary to Auto Remarketing, Kontos described a key wholesale segment he plans to watch as the second half of this year unfolds. Kontos’ curiosity stems from rental companies taking on about 300,000 more units in 2010 than they did during the previous year.

“That led to an expectation on my part that we might see come fall de-fleeting time frame which is typically when the rental cars are replaced with new models and the new-model year starts,” Kontos explained.

“I am expecting that we might see some of those 300,000 units show up in the auctions, partially alleviating the very tight supply conditions we’ve been seeing for quite some time,” he continued.

Will the auction lanes be full of off-rental units?

“I’m not entirely sure we’ll see a significant number of those units,” Kontos conceded.

“The strain on new-vehicle supply that’s been created by the situation in Japan has rental companies thinking about keeping cars in service longer. They might be having a hard time finding a replacement unit because of the lack of supply,” he went on to say.

"That’s something I’m watching for in the second half of the year,” Kontos concluded.

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