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In this installment of the Used-Car Market Intelligence Report series, Auto Remarketing tackles one of the more pressing industry concerns in recent years: used-vehicle supply (or often lack, thereof).

While signs appear to be pointed in the right direction for dealers, finding enough used vehicles to fill their lots still can be a challenge.

To help demonstrate the supply situation faced by dealers in the first half of 2012, we talked to some of the industry’s top economists and analysts and broke down the analysis by wholesale and retail channels.

First up was the wholesale market.

Wholesale Value Set to Bounce Back Stronger

Dealers still might wonder, “Where are the cars?”

In response, economists from both Manheim and ADESA pointed toward 2013 as the point when wholesale volume rebounds even stronger than the lift dealers were seeing in the first half of this year.

Manheim’s Tom Webb and ADESA’s Tom Kontos each mentioned the uptick in off-rental volume combined with dealer-consignment growth as the catalysts for more units passing down the lanes during the first six months of 2012.

In speaking with Auto Remarketing in June, both wholesale experts touched on how both they and used-car managers are setting their sights on next year’s projected volume pick-up as a tell-tale sign the market is further recovering from the lagging doldrums of 2010.

“The industry is definitely looking forward to 2013,” Webb indicated. “The only problem there might be is the economic recovery is a little bit shaky. If something were to be announced, something bad, it would hit dealer consignment, but the commercial volumes certainly should show some growth in 2013.”

Meanwhile, Kontos is eyeing wholesale growth in two specific segments.

“The expectation is more off-lease volume will return in 2013,” Kontos said. “In addition, I wouldn’t be surprised if we see some more repo volume, as well, just based on the aggressiveness of automotive lending that’s taking place right now. Delinquency rates are still at manageable levels. Just the sheer amount of credit availability would lead one to expect more repo volume next year.”

“Clearly, the off-lease volume is the one we’ve been talking about for quite some time coming in 2013,” he added.

Discussion About First Half of 2012

While the upbeat scenario points to a strong wholesale volume rebound in 2013, both Webb and Kontos alluded to how the market wasn’t too rough on dealers through the first six months of this year.

“Generally speaking, I would say we were pleased with volumes,” Webb said. “Volumes are fairly predictable, but there were some pleasant surprises, primarily on the off-rental side. That’s where the volumes were up quite substantially. Of course, dealer consignment volume continues to grow because the retail market continues to grow.

“However, off-lease volumes are continuing to decline. And certainly the way loans are performing, repo volumes are also down,” Webb added. “I think the third quarter might show a little bit more weakness in off-rental because they were up so strong in the first half of the year. They were basically front-loaded.”

He went on to say: “Other than that, I think we’ll see a normal pattern. The off-lease volume has some potential to rise in the fourth quarter although the fourth quarter is relatively small in terms of auction volumes in total. But relatively speaking, they might start to show some improvement by then.”

When talking about the first half of this year, Kontos mentioned how franchised dealers are selling more used vehicles, while independent stores’ retail sales are off slightly so far this year. But they’re compared to a strong 2011 performance.

He reiterated how franchised dealer activity sparked wholesale volume and likely will through the rest of 2012

“The strength of new-vehicle sales so far this year indicate that dealer are taking more trade-in volume, and as a result we would expect more dealer consignment volume,” Kontos explained.

“That’s an area we’ve not only been proactive in working to get more volume into the auctions through dealer consignment, but some of it is coming naturally through the growth in new-vehicle sales,” he continued. “From both of those vantage points, we’re seeing growth in dealer consignment volume over the other segments.”

2011 Auction Volume Totals

During the second quarter of this year, the National Auto Auction Association revealed its 15th annual survey that pinpointed activity for all of 2011.

The survey determined sales of used vehicles by members last year totaled 7.7 million units worth $73 billion.

NAAA’s study also found the number of vehicles entering the auctions decreased by 1.6 percent to 13.7 million, and the percentage of units sold was down 3.5 percent.

Conducted by CliftonLarsonAllen of Arlington, Va., for NAAA, association leadership said the survey provides the most accurate picture available of the wholesale industry, with a 70 percent response rate representing 220 North American member auctions.

The numbers for sales, units’ entered and gross value are projected to the total NAAA membership of 314.

The survey also revealed dealer-consigned vehicles represented the largest number of units sold at 53.1 percent, followed by fleet/lease and repo vehicles at 35.8 percent, followed by factory vehicles 7.7 percent and 3.4 percent from other sources.

“Given the strain on the auto industry that began in 2008, the 2011 results were very encouraging,” stated NAAA president Charlotte Pyle.

“I believe the slight volume decline in 2011 is a sign the industry will soon see increases in the overall volume of cars entering and being sold at the auctions,” Pyle continued. “The survey results show the strength and depth of a mature industry that despite various challenges has demonstrated its resiliency.

“I’m confident we’ll continue to be a vital and growing part of our nation’s economy in the decades to come,” she added.

Retail Used Supply on Upswing

After years of supply shortages, the first half of 2012 gave dealers some reprieve.

Based on the listing data from Kelley Blue Book’s Kbb.com, used-vehicle inventory — as of early June — was up between 10 percent and 15 percent compared to where it was in the fourth quarter of 2011.

“This can be accounted for by the slight increase in two-year, off-lease volume as well as the jump in trade-ins due to increased new-vehicle sales,” explained Alec Gutierrez, KBB’s senior market analyst for automotive insights, in early June.

And when asked what he believed to be the dominant theme regarding retail used supply in the first half of the year, Gutierrez had this to say: “Used-vehicle supply has improved, largely as a result of increased trade-ins due to the robust sales gains through the first five months of the year. Interestingly, consumer interest in used vehicles has leveled off some due to the attractive finance offers on new vehicles coupled with high values of used cars.

“Values of one- to three-year-old used vehicles remain approximately 20 percent higher than they were in 2009, and in many cases, new-vehicle pricing and late-model used-vehicle pricing has converged. In fact, used-vehicle registrations declined by close to 10 percent year-over-year in March, as late-model, used-vehicle values approached original MSRP, thus making new vehicles the more attractive purchase,” he continued.

“So, while supply conditions have started to improve, demand may be trailing off some which will lead to softening values in the months ahead,” Gutierrez added.

He also pointed out that in early June, values were down about 3.7 percent year-over-year. There won’t likely be a major correction soon, Gutierrez said, but it should be noted that “mild softening” is expected to continue.

Breakdown of Supply Numbers

Moving along, Gutierrez also offered a breakdown of how exactly the different retail used supply channels are working for dealers, starting with trade-ins.
While KBB did not have any concrete numbers to offer, it offered an estimate based on recent new-vehicle sales gains and what the firm noticed in its recent consumer sentiment survey.

Citing KBB Market Intelligence, Gutierrez explained that nearly all (97 percent) of new-vehicle intenders currently own a ride. Of those consumers, more than half (56 percent) say they’ll make a trade-in when they buy a new ride.

In explaining KBB’s estimate, he also pointed out that new-vehicle sales climbed about 13.4 percent through the year’s first five months.

“Since our survey work is representative of the overall buying public, we can then surmise that of the 700,000 additional vehicles sold through the first five months of this year, (5.983 million in 2012 vs. 5.277 million in 2011), dealers should have seen an influx of 350,000 additional vehicles through the first five months of this year-over last year,” Gutierrez explained.

“It’s worth noting that not all of these vehicles will be made available for retail sale on a dealer’s lot; a number of these will end up at auction. This represents a 7.5-percent increase in trade volume versus 2011 for the average dealer,” he continued.

Next up, Gutierrez tackled off-lease volume.

Given the downturns in leasing experienced between August 2008 and March 2010, off-lease volume won’t expect to reach “normal” levels until after the first three months of next year, he said.

However, Gutierrez did point out that modest gains in off-lease volume began showing up early in 2012 because of the two-year leases from 2010 hitting the auction block.

Giving some numbers to paint a picture of the changes the leasing market went through, he noted — citing Polk — that the average lease originations written each month during the “down period” was roughly 80,000, compared to about 200,000 originations per month in earlier times.

Offering some more insight, Gutierrez emphasized: “Where the challenge lies is that many of the most desirable off-lease vehicles are being sold upstream to franchise dealers before ever arriving at a dealer auction. This is limiting the number of off-lease vehicles hitting auctions or made available to franchise and non-franchise dealers at open sales.

“Even though much of this volume is being purchased upstream, the small increases in volume have provided some relief to dealers that have had to suffer through several years of scarce volume,” he continued.

Lastly, Gutierrez commented on the state of retail used supply from the rental market, noting that it has been rather static.

“Rental-car volume has remained relatively flat as we have heard from several major rental car agencies that they are unable to acquire enough vehicles from OEMs to satisfy the needs of their daily operations,” he noted. “Rental car agencies have continued to hold onto vehicles longer and have not increased the number of vehicles hitting auctions by a significant margin.”

Auto Remarketing Editor Joe Overby contributed to this report.

Editor’s note: Stay tuned to Auto Remarketing Today for Part III of the “Used-Car Market Intelligence Report,” where we look at used-retail sales and used-vehicle values. The complete report can be found in the July 1 print edition of Auto Remarketing. To see Part I, visit here.