Webb: Does Used-Car Price Ceiling Exist?

There was a “new high” in wholesale prices during November as the market experienced its third straight month of wholesale gains, according to Manheim’s Tom Webb. He expressed a bit of skepticism when discussing the popular notion of a “ceiling” on used-car prices caused by trends on the new side.

Specifically, the Manheim Used Vehicle Value Index was at 124.3 during November, up 5.9 percent year-over-year.

While acknowledging that there seems to be a “flexible ceiling” for prices in some wholesale segments that has started to expand, Webb argued against what he said has been a popular notion regarding limitations on used values.

“The ability of wholesale used-vehicle values to rise beyond what many considered the natural limitation imposed by new-vehicle pricing reflects the flaw in that type of analysis when it fails to appreciate the numerous other factors involved,” he shared.

“There is no simple used-to-new price ratio that signals when a limit has been reached. Or, as we have stated in the past, ‘new-vehicle prices impose a ceiling on used-vehicle values, but it is a flexible ceiling with many contours,’” Webb explained further.

“Because the new- and used-vehicle markets are both monthly payment driven, the important ratio is not transaction prices, but loan-to-value ratios, credit-adjusted APRs, loan maturities, and the resulting monthly payment,” he added. “Given that new vehicle incentive activity has remained restrained and the model-year changeover was smooth, the monthly payment ratio between the two markets is not as far out of line as it has been at some points in the past.”

And while acknowledging the “waterfall effect” where pricing changes on the new-vehicle side steadily trickle down to the used-vehicle side, the segments most easily impacted are the late-model vehicles, “especially those that represent a real substitute to a new-vehicle purchase,” Webb explained.

Supply of these “nearly new” vehicles is low, thanks to decreases in off-rental units, late-model trade-ins and early-cycle repossessions.

For the last two years, Webb noted, vehicles sold at auction have seen their average mileage climb throughout every segment.

“And, with significant redesigns and new options, manufacturers have been able to make many models less susceptible to substitution pressure from the nearly new market,” Webb continued.

“The real restraint on wholesale pricing is that imposed by the dealer’s ability to pass on cost increases. That restraint has yet to appear,” he noted. “Dealer margins have held steady and, with better F&I opportunities, used-vehicle profits for many dealers have risen to record levels.”

Offering a bit of a caveat, Webb added: “All that said, it does appear that wholesale pricing in some segments has begun to stretch the flexible ceiling imposed by the new-vehicle market.”

Continuing on, he also offered some analysis into the wholesale trends of different vehicle segments.

He pointed out that a major factor spurring the overall wholesale increase was the midsize car segment, which climbed 7.1 percent year-over-year.

Among the six segments listed in Manheim’s data, vans showed the largest increase (up 11.2 percent), followed by pickups (up 7.9 percent) and compact cars (up 7.5 percent), respectively. Rounding out the list were midsize cars, SUVs/CUVs (up 4.4 percent) and luxury cars (up 1 percent).

“Year-over-year price increases for the various market classes have regressed towards the overall average in recent months,” Webb noted. “In November, sporty cars did very well, indicating that, even in an era when dealers often use online auctions as virtual, just-in-time inventory, many like to pre-buy at what they consider good prices.”

He also pointed out the stability in rental-risk and rental-repurchase vehicles. There “virtually” wasn’t any seasonal drop-off in the prices for rental-risk units, in particular, from September to November.

“That’s a testament to a well-managed model-year changeover,” Webb said of the rental-risk units. “Likewise, average pricing for rental repurchase units sold at auction in November remained level with both the previous month and year-ago level.

Moving along, Webb spotted some trends in commercial fleet sales, in particular. He noted that end-of-service fleet units showed price gains (mileage-adjusted basis) throughout close to every class.

“The all-important midsize car segment showed the strongest performance. Indeed, a mileage- and seasonally-adjusted index of pricing for end-of-service midsize fleet cars reached an all-time high in November,” Webb shared.