CARY, N.C. -

A telling sign for the used-car supply shortage is evident in the latest Wholesale Market Update from J.D. Power Valuation Services.

There were 3.91 million vehicles (up to 8 years old) sold at auction last year, which was down 13% year-over-year.

“However, when compared with pre-pandemic levels, auction sales trended 25%-30% lower during the course of 2021,” J.D. Power said in the analysis.

Most of the year-over-year softness is in the mainstream segment, where auction sales of 3.30 million units were down 15% from 2020.

The slowdown in mainstream volume is “being amplified by large reductions in passenger car wholesale volume,” J.D. Power said.

Automakers have largely reduced passenger car options in their lineups, so perhaps this is now playing out in the wholesale market, as well.

On the luxury side, wholesale auction sales for premium vehicles were at 615,000 units in 2021, a 2% drop from 2020.

“This was a major contributing factor as to why premium prices weren’t up quite as much as mass market in 2020,” the company said of the milder volume drop for luxury.

Off-lease volume at auction at 'record low'

And a big contributor to the overall decline of vehicles in the auction lanes has been the slowdown in commercial consignment, particularly the off-lease variety.

“The supply of used vehicles sold by commercial sellers has been well below historical norms during all of 2021,” Manheim Consulting vice president Kevin Chartier said during a conference call earlier this month.

“Off-lease vehicles are normally the largest source of commercial vehicles sold at auction,” Chartier said. “While the total number of leases scheduled to terminate remain near-record highs, the number making their way into auction sales channels are at record lows.”

What’s happening is that resale values have seen an “incredible surge,” and with that, end-of-lease vehicles are now in stronger equity positions, he explained. Typically, at least 60% of end-of-lease vehicles end up in wholesale.

“However, with today's tremendous equity position, the vast majority of these vehicles are being purchased at lease termination prior to entering the wholesale market, leaving less than 15% of the normal volumes heading to auction in the fourth quarter of the year,” Chartier said.

Rental companies now 'net buyers' instead of 'net sellers'

Elsewhere among commercial consignor types, repossession volumes are similarly down. Given the historically low default rates on auto loans, repo volume in Q4 was more than 40% softer than pre-COVID volumes, Chartier said.

Rental volume has been significantly impacted, as well.

“On the rental car front, the acute shortage of new-vehicle availability continues to depress de-fleeting activities, resulting in about a 70% reduction in Q4 rental auction volumes as compared to the last normal year, 2019,” Chartier said.

And in a bit of irony, the shoe was on the other foot for rental car companies in an “incredibly different year,” Chartier said.

“In 2021, they became net buyers of vehicles in the wholesale marketplaces as opposed to net sellers, simply because they could not acquire new vehicles to re-fleet with,” he said. “So, they were heavy buyers of near-new segments, the cleanest possible cars.

“And there was some distortion in terms of pricing that we saw with 2- and 3-year-olds related to that. The fourth quarter really was more of the same as they filled up in the first part of the fourth quarter in preparation for the holiday season … and then they back off in December … So, until they can actually start sourcing a relatively steady supply of new vehicles from the new-vehicle production pool to re-fleet with, we're going to continue to see this pattern play out.”

Chartier anticipates it will likely be mid-year before rental car companies can get enough new vehicles needed to re-fleet and resume their “more normal pattern.”

Cox Automotive chief economist Jonathan Smoke added during the Q&A: “It was really the rental car companies that were the key catalyst to the second run of price appreciation we saw in the fall. It was not retail driven. Even though retail sales were stronger once we got into the late summer months, relative to a couple of the months in the middle of the year. It was really the difference of the rental car companies and in fact they had their biggest purchase months in the fall months before December. So as long as they are buying instead of selling, that's going to add additional pressure and we don't believe they're getting the units they need from the new-vehicle market.”

Typically, rental commands a 5% to 10% share of sales activity in the wholesale market, the analysts said.  Last year, it dropped to 2%.

Chartier said that rental car companies always purchased some used cars in the wholesale market, but last year, “the relative mix of cars that they bought versus the rest of the market was up by about five times.”

Smoke added: “So, (it was) an interesting contrast: rental sales were down 60%. Rental purchases were up more than 500%. That tells a lot.”

Total wholesale figures 

Looking at total wholesale volumes — of which physical auctions are a subset — Cox Automotive said that, while the numbers are not yet final, it appears volume came in at 13.6 million for 2021.

That’s up from 13.5 million in 2020, but still well below the 15.0 million in 2019.

“What you need to take away is that 2019 was the peak year for wholesale supply,” Smoke said. “We expect to see only modest gains in total wholesale volumes in 2021 and 2022. And we won't get back to 2019 levels as off-rental, off-lease and repo remain well below 2019 levels.

“Then next year in 2023, we will see the total wholesale market decline, driven primarily by a 15% decline in lease maturities. It should be noted that physical auctions represent a subset of the wholesale market, and auctions already saw a big collapse in off-lease volumes in 2021,” Smoke said.

“A silver lining to the challenges in commercial in 2021 has been that stronger retail sales and more off-lease arbitrage caused dealer consignments and dealer-to-dealer volumes to grow,” he said. “Much of that dynamic should continue in 2022.”

In fact, dealer consignment jumped from 6.2 million units in 2020 to 7.6 million in 2021, according to the estimates. It is projected to reach 7.7 million in 2022 and stay above 7 million for the following two years, as well.