BLACK BOOK – Black Book recently published an update to their COVID-19 Market Updates, which includes:
- Current Wholesale Prices & Price Trends, including Auction Volume & Insights and Sales Rates
- Used Wholesale Price Trends & Projections, including a Compact Crossover/SUV Segment Highlight (Historical Trends of the Segment)
- A Look at the Retail Vertical, including Retail Prices & Dealer Insights
- New Vehicle Sales Outlook, including Forecasted Economic Scenarios
- Used Vehicle Supply Projections, including Lease & Rental Unit Returns
During recent testimony by Federal Reserve Chair Jerome Powell, he noted that during the months of April and May, “stimulus checks and unemployment benefits are supporting household incomes and spending.” This federal stimulus, together with still limited used vehicle inventory, helped to maintain the strength of wholesale prices across almost all vehicle segments, with volume-weighted overall car and truck segments both showing gains for the fourth week in a row, increasing 1.27% overall – the highest weekly appreciation in recent history. As for specifics, the overall car segments increased by 1.54% (compared to 0.88% the prior week) and the overall trucks and SUV segments increased again this past week at 1.11% (compared to 0.52% the prior week).
Auction sales volume has returned to pre-COVID-19 levels, with most auctions still operating in a digital only environment. Over the weekend we received word that a limited number of Manheim operating locations were going to allow sellers to represent their vehicles on the block during a pilot period. These Digital Block sales offer in-lane bidding with a live auctioneer, however vehicles will not run through the lanes. At the same time, we hear that ADESA is making their own plans to start a similar pilot set to launch shortly. These changes at the large auction houses come on the heels of the successes being achieved by independent and smaller auction chains who opened back up to in-lane sales over the last few weeks. Demand has been high and dealer attendance, both in person and online has been significant at these independent auctions, with many achieving above average sales volume and retention. Buyers have been vocal about their desire to attend these sales in person, adding to the pressure received from the large auction houses.
Although we see some recovery in rental demand (outside of airport business), we measured a substantial increase (compared to previous weeks and compared to last year) in volume of rental units sold, as rental fleet companies are beginning to de-fleet and reduce their fleets to match much weaker consumer and business traveler demand. As the supply continues to grow, we are concerned with the throughput at major auctions, as they continue to operate with reduced staff. In our continuous conversations with management teams from major auction chains, they report that they are trying to execute on the increased volume and customer demand without immediately bringing back significant amounts of furloughed staff. There is a concern that this uptick may be short-lived and the need for increased staff may be temporary.
Since the beginning of April, weekly initial unemployment claims remained at record levels. Last week, the Labor Department reported that the US added 1.51 million new jobless claims. The US unemployment rate in April was 14.7%, the highest monthly rate since the Great Depression. In a surprise to many economists, May unemployment decreased to 13.3% due to the success of the Federal Paycheck Protection Program (PPP) and other stimulus measures. The Labor Bureau also noted in its report that there was a classification error in its survey, and the real unemployment numbers should be about three percentage points higher for both April and May. There is also concern that without further Federal stimulus, these gains will be temporary and employment numbers may deteriorate once PPP expires.
With a weakening of the economy, consumer confidence is low. The University of Michigan’s Monthly Consumer Sentiment Index in May was 72.3 points (a slight uptick from April’s 71.8). With one-time stimulus payments and extended unemployment benefits helping the economy, the preliminary index for June increased to 78.9. As a reference point of how uneasy the consumers are about the economy, the Index was at 101 in February.
As more economic data for the second quarter of 2020 arrives, “the GDPNow model [from the Federal Reserve] estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 was -45.5% on June 17th.”
The overall weakening of the economy is causing demand for vehicle purchases to decline. In addition, gasoline prices reversed the May trend, and started to increase, up $0.33 since the lowest point at end of April to $2.10 per gallon last week, according to the U.S. Energy Information Administration.
At the same time, we expect a large, incremental influx of used inventory to hit the marketplace over the next six months, coming from prolonged lease return delays and downsizing of rental fleets (including the expected sell-off of a large number of Hertz’s units). In addition, lenders expect a significant increase in delinquencies and repossessions in the upcoming months as economy goes through high unemployment. The number of accounts in ‘hardships’ jumped substantially in April and May across all risk groups according to the Monthly Industry Snapshot by TransUnion.
Due to these factors, we expect both wholesale and retail prices to deteriorate later in the Summer. On the other hand, due to better than expected (but still very high) unemployment numbers, it is possible that the automotive industry will avoid a more catastrophic economic scenario (severe prolonged recession) that was considered as one of the scenarios in our residual value projections.
Although the economic effects of the pandemic will continue to be felt as far out as three years from now, we still project that wholesale values will return to the pre-COVID-19 baseline by 2023. Used supply will decline due to cuts in retail and fleet sales throughout 2020 and into 2021.
CURRENT WHOLESALE MARKET OVERVIEW
Auction activity this past week was on fire, with high conversion rates and high sale prices. Most no-sales this past week were the result of sellers holding firm to floors and not due to a lack of demand by the buyers. As a result, buyers are having to pay top dollar to secure quality inventory.
Available supply continues to be problematic for dealers that are in need as we near the end of a strong retail month. The lack of repossessions, delayed lease returns, and staffing limitations at the auctions are all contributing to low inventory levels at the auctions. The estimation is that it will be at least two more weeks before we start to see an increase at many auctions around the country.
Select Manheim locations are now allowing sellers to physically represent their vehicles from the block and a select few locations will allow buyers to be present on the lanes during sale time. Despite the introduction of this new Digital Block, all Manheim locations continue to not allow vehicles to be driven across the lanes.
Despite most auctions continuing to operate under an all-digital platform, sales volume has rebounded to a level consistent with, and on some days higher than, this time last year. This is being driven by strong retail sales, which are then leading dealers to use auctions as their main source of inventory. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales (and some closed entirely) at the end of March. The graph below illustrates the estimated year-over-year change in sales volume of the wholesale market.
At the onset of the pandemic, as shelter-in-place orders went into effect, sales rates quickly tumbled into the teens, but rates have been climbing each week. We are now back at a level that is typically reserved for the Springtime buying season. Black Book’s estimate of the Weekly Average Sales rate is presented below.
CURRENT WHOLESALE PRICE TRENDS
Current Market Level View
Volume-weighted, overall car segment values increased 1.54% this past week. All car segments experienced increases, with the most notable increase being the Compact Car segment with a gain of 2.29%. When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 1.11% last week with all segments increasing except Full-Size Vans. The Small Pickup segment led the increases with a strong rebound of 2.89%. Both the Small Pickup and Compact Car segments experienced very large depreciations at the onset of the pandemic but have been consistent in the rebounding of prices week after week. Minivans also had a second week of increasing prices at 2%, after 11 consecutive weeks of declines.
The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans for the last several months. We have now experienced four weeks of overall market rebounding with consistent week-over- week increases in almost all segments.
Year Over Year View on Wholesale Prices
The graphs above compare Black Book’s Seasonally Adjusted Retention Index for 2019 and 2020 calendar years. The Black Book Used Vehicle Retention Index is calculated using Black Book’s published Wholesale Average value on two- to six-year-old used vehicles, as a percent of original typically-equipped MSRP. It is weighted based on registration volume and adjusted for seasonality, vehicle age, mileage, and condition. The Index offers an accurate, representative, and unbiased view of the strength of used vehicle market values. It measures an ‘apples-to-apples’ year-over- year retention comparison.
2020 started slightly below 2019 levels, but the market showed early strength in February and March. As the US economy shut down due to the COVID-19 pandemic, we measured the highest single month drop of 6.9 points since launching the Index. As we entered Summer, wholesale prices continued the rebound that started during the second half of May, with a projected increase of about three points in June. Currently, the Index is still below last year’s value, as instead of Spring price strengthening, we had a record drop due to the COVID-19 shut down.
During the last recession (2007-2009), the Index lost about 15 points in a span of 12 months before the recovery started. We project that during the current recession, the Index will decline in the next six months, but will start recovering afterwards in our most likely economic scenario. One of the main differences between this and the previous recession is the forced and abrupt shutdown of assembly lines and, as a result, significant reduction in projected used vehicle supply in 2021 and beyond.
Segment Highlight – Compact Crossover / SUV
The Compact Crossovers/SUVs (CSU) segment has grown in popularity in recent years as consumer preferences have shifted from cars to crossovers. CSU has grown significantly, from 9% of market share in 2007 to 20% to date. Currently, it is the largest segment and provides consumers the functionality they desire with the easy and fun to drive feel of a sedan. This segment is beneficial to the industry due to the fact that most (non-luxury) manufacturers have entered this segment, there are low barriers to entry for consumers, and the competitiveness of the segment forces manufacturers to stay current with demand. In fact, some OEMs have actually decided that the best way to cover this market share is to have multiple entries within the segment: Jeep has Cherokee & Compas, Mitsubishi the Outlander and Outlander Sport, Subaru Crosstrek and Forester, etc.
Prior to 2008, the popularity of Crossovers/SUVs was growing, and the Black Book Retention Index for Compact Crossovers was trending along with the market level Index, reaching a high of 108.2. During the recession in 2008/2009, the Index fell to a low of 76.1 for the segment, as compared to the market level low of 89.1. As the segment share and popularity have grown, the market has become more competitive and this has kept the retention lower than the overall market. During the COVID-19 shutdowns, the Compact Crossover segment also experienced a large change, falling 8.7% from March to April, down to 90.8. This was a large change but was not as large as the 11% drop experienced by the Compact Car segment.
The Crossover/SUV segments are highly competitive and have seen quite a bit of volatility in prices throughout the pandemic. Prior to the pandemic, prices for all segments were on a normal seasonality pattern with incremental increases leading into what was expected to be a strong Spring. However, at the onset of the pandemic when fuel prices began to fall and shutdowns forced people to shelter-in-place, the similarities in market movements between the Crossover/SUV segments ended. The fuel-efficient Compact and Sub-Compact Crossover segments experienced much stronger depreciations than the overall Truck/SUV market and the larger Mid-Size Crossover/SUV segment. However, the rebound has been stronger with Compact Crossovers, experiencing some of the largest week-over-week increases in recent weeks.
USED WHOLESALE PRICE PROJECTIONS
Wholesale Price Impact Under the Most-Likely Economic Scenario
Wholesale prices dropped significantly in April as uncertainty over COVID-19 impact and response dampened vehicle demand, resulting in an overall wholesale price decline of 5.9% in April. We saw a substantial improvement in prices during the last two weeks of May as the monthly decrease was limited to only -1.5. As we entered June, wholesale prices continued to increase, and we now project that we will see an overall market appreciation for the entire month of June. As a comparison, last year’s prices declined by 0.9% over the same period.
Black Book’s preliminary July Publish Residual Values (dashed lines) reflect a new economic reality. Together with the temporary strengthening in demand in June, projected values will continue to stay well below pre-COVID-19 projections over the next two years, with the deepest declines expected over the next six months. The green line represents our most-likely economic scenario that does not include a possible second wave of COVID-19 and a still undefined second stimulus package. A more severe and prolonged recessionary scenario is shown in red. Projections are indexed to the pre-COVID-19 projections (black line). All values are weighted by the used vehicle sales volume (actual, where available, or projected).
Short-Term Outlook (Summer / Fall of 2020)
We project a drop in wholesale prices compared to a pre-COVID-19 baseline this Summer/Fall, as the US economy suffers through the effects of COVID-19. We anticipate that later this Summer and Fall, the wholesale prices will be between 10% and 15% lower than originally projected before the pandemic, due to a glut in supply and much weaker demand. Prices will start to recover in 2021 as the economy becomes stronger. We also anticipate that older (>6-year-old), cheaper vehicles in average condition will not decline as much due to increased demand for these units.
Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023)
The effects of the pandemic will continue to be felt, but we continue to project that values will return to the pre-COVID-19 baseline as used supply will decline as a result of cuts in retail and fleet sales throughout the remainder of 2020 and into 2021.
Wholesale Price Impact Under a Severe Recession Scenario
In this scenario, we project a drop in wholesale prices of more than 20% later in the Summer and Fall, compared to a pre-COVID-19 baseline, with a slow recovery in 2021. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023.
In the age of proliferation of ‘no-haggle pricing’ for used-vehicle retailing, asking prices accurately measure the trends in the retail space. From the peak in early April until the end of May, retail listing prices decreased by about 5% – a much lower decline compared to wholesale prices. In the last ten days we saw a temporary stabilization of retail prices fueled by higher consumer demand due to stimulus payments and federal Paycheck Protection Program (PPP). We expect retail prices to continue their decline later in the summer as stimulus payments are exhausted and the protection in PPP expire.
Lack of inventory to meet consumer demand continues to plague many dealerships as the unexpected increase in retail sales has left them with limited offerings, new and used, on their lots.
For many new car dealers, it could still be 2-3 weeks before they start receiving new vehicle deliveries. New car manufacturing is back up and running, but the backlog of orders to fill is large and supply chain issues continue to cause slowdowns in production.
Some dealers are now finding themselves having to buy lower quality units and perform their own reconditioning. The high price the quality used units are bringing on the lanes leaves only a small margin for the dealer once it is retailed.
NEW VEHICLES SALES OUTLOOK
Our New Sales Outlook remains unchanged from last week. We anticipate a significant reduction in US new vehicle sales in 2020 (both retail and fleet sales) due to continued reduction in consumer demand. This is a result of several ongoing factors, including less miles driven due to remote work and shelter-in-place initiatives, high unemployment, and an overall feeling of uncertainty by consumers. Overall, new sales were down 23% during the first five months of the year, compared to last year (with a 30% YOY decline in May as most states started to lift shelter-in-place orders). Even as OEMs are restarting assembly lines, there are significant challenges to get back to a normalized production schedule as we reported in previous updates.
In our base economic scenario, we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 12.7mm units. In a deep economic recession scenario, we project a 40% drop in new sales in 2020 to 10.2mm units.
In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. The table below summarizes Black Book’s projections for new vehicle sales for the next several years under both economic scenarios.
USED VEHICLE SUPPLY PROJECTIONS
- Black Book projects a higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors:
- Delayed lease returns resulting from lease extensions offered by OEMs – more than 560,000 additional three-year-old units
- Extensive de-fleeting by rental car companies, due to lack of consumer and business traveler demand and financial pressure to raise cash – at least 250,000 one- to two-year-old vehicles
- Dramatic reduction in auction activities due to COVID-19 in March, April, and May
- Increased repossessions due to deteriorating economic conditions in addition to delayed repossessions in April / May
Short Term Lease Return Projections
When we started the year, lease returns were projected to hit a record volume of above 4.1 million units. Once the pandemic was underway, and most manufacturing stopped, OEMs started to encourage lease extensions in order to push returns further into 2020 when they would be in a position to provide replacement vehicles. As a result, we project at least 560,000 additional units in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in April / May, along with expected turn-ins of the lease extensions.
Rental Unit Returns
Business and leisure travel collapsed at the end of March. We expect a significant reduction in both categories for the remainder of 2020. In addition, there is no expectation that travel will return to pre-COVID-19 levels in the next several years. According to IATA (The International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023. This puts tremendous financial pressure on rental companies that rely on air travel, to reduce both their current fleet and future acquisitions. At the end of May, Hertz filed for bankruptcy in North America as a result of the pandemic.
In addition to Hertz, we expect other rental companies to reduce their fleet during the Summer and Fall months to match lower demand for rentals. This practice will lead to over 250,000 additional rental units hitting the wholesale market over the next six months. Note that this is a base case scenario in which rental companies (excluding Hertz) can gradually reduce their fleet instead of a rapid-fire sale.
The graph below shows Black Book’s projections for rental returns. The purple line shows the difference between current (darker rectangles) and pre-COVID-19 projections (lighter rectangles).
In the longer term (later 2021 – 2023), the drop in rental return volume will benefit the price of newer used units, as supply will be limited.
Longer Term Used Returns Projections
With the reduction in retail and fleet sales over the next several years, we project approximately 75k used units per month less in the market in 2023, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations.
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