NADA Used Car Guide Spots “Dichotomy” in Used-Vehicle Market

In light of the disparity found when comparing economic optimism within the “business side” of things to the level of optimism (or lack thereof) among consumers, NADA Used Car Guide executive automotive analyst Jonathan Banks suggested that the used-vehicle market is experiencing somewhat of a “dichotomy.”

In essence, he explained, the economic and auto industry outlook from a business standpoint appears to be moving back to a stronger sense of optimism, while consumers don’t have as rosy an outlook.

Banks tackled this issue and more in an overview of auto market trends based on NADA Used Car Guide’s latest Guidelines report.

“During my research for this presentation, I witnessed a fairly significant return to optimism in regards to our economy and the auto industry in particular,” he shared.

“Manufacturing suggests new orders are increasing, the DOW has been near 11,000 for most of the month and retail sales have shown modest growth while debt has concurrently declined,” Banks stated.

There has been greater production, which he said was “not surprising, since we have already seen an increase of 3 million vehicles during 2010 compared to last year.”

Moreover, throughout every market, there has been loosening in credit, Banks pointed out. This is mirrored by the credit application increase and rejection rates dipping.

“In fact CNW data shows a higher percentage of buyers have credit scores under 670 compared to earlier in the year. The result has been improved new-car sales, stable inventory and low incentives,” he shared.

“October sales are expected to eclipse 12 million SAAR and manufacturers are posting strong profits,” Banks shared.

Positive projections can also be seen in the fact that automakers are planning to invest in initiatives to foster job recovery, create more diverse vehicle lineups and bolster fuel economy as well as implement “flexible production” to maintain the proper alignment between production and demand, Banks said.

However, the same sense of optimism is not being displayed among consumers, he pointed out.

“Unemployment remains flat at just under 10 percent, incomes are down, and consumer sentiment is at its lowest point since 2009. In addition, the employed are also hesitant to make large purchases. Paul Taylor, NADA’s chief economist, stated in his most recent update that if employed consumers ‘are not worried about a second recession, they are at least mourning the loss of home equity,’” Banks explained.

“So consumers have quite a bit of concern when making new purchases regardless of their employment situation,” he continued. “Ronald Reagan aptly stated that, ‘Unemployment is always one of the last things to turn around as an economy heads into recovery. And make no mistake, America is recovery bound.’"

Those words from the former president still are applicable today, Banks suggested, adding that “a full recovery will be a long road ahead.”

These trends certainly have an impact on the used-car market. Banks examined this effect more in-depth.

“Right now we have a dichotomy of sorts; optimism on the production side with a relatively jittery consumer base on the other — in fact, CNW’s jitter index is at an all-time high,” Banks pointed out. “Demand for used vehicles remains strong, but margins have fallen for used models primarily due to the increase in wholesale prices.”

With used prices climbing, consumers become more likely to move to the new vehicle of the market. There have more vehicles produced, so automakers may find it “tempting” to bolster incentives to lure consumers to the new-car side, as well, Banks noted.

“This will result in a decline in new-vehicle transaction prices plus an increase in trade-ins causing some downward pressure on used-car prices,” Banks stated.

“Adding this layer to normal seasonal depreciation may result in additional softness on used-car prices during the remainder of the year if employment indicators do not improve,” he continued.

Moving on, Banks took a look at the trends regarding AuctionNet pricing. He indicated that at the time of the analysis, the typical seasonal behavior regarding deprecation that was shown in September AuctionNet prices was remaining in October for th majority of model years.

The majority of car segments were showing between 2 percent and 4 percent sequential softening, he shared. Trucks were once again ahead of the curve.

Banks further pointed out that: “2010 fleet returns continue to put pressure on 1- and 2-year models as a high volume of these models are entering the market.

“None of these declines are surprising, but do indicate a return to normal seasonal price movement,” he continued. “On a year-over-year basis, auction prices in October are trending about 3 percent above 2009 prices on cars and CUVs, 7-8 percent higher on Pickups and SUVs, and 6 percent higher on vans.:

Looking forward, Banks suggested that should stability continue in the new-vehicle environment, the conclusion of 2010 will be of a “similar positive” tone.

To see Banks’ video presentation of this report, visit here.