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 Sub-Compact Luxury Crossover Segment Highlight
- 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
As we begin the second half of the year, the month of July has started strong, with values continuing the ascent that began toward the end of May and carried throughout the month of June. Federal stimulus, together with very limited amounts of used vehicle inventory, helped to maintain wholesale pricing strength across all vehicle segments during the past week. This is the first week we’ve seen increases throughout each of the 22 vehicle segments. Volume-weighted, overall car and truck segments both showed gains for the seventh week in a row, increasing 1.41% overall this week. The prior week, the holiday slowed the rate of increase a bit, but it was back to large gains again this past week. As for specifics, the overall car segments increased by 1.70% (compared to 1.19% the prior week) and the overall trucks and SUV segments increased again this past week at 1.24% (compared to 0.73% the prior week).
For the whole month of June, we saw the largest ever recorded month-over-month increase in wholesale prices, as measured by Black Book’s Monthly Seasonally Adjusted Retention Index, increasing by a staggering 9.1 points. This increase corresponds to a 5.7% increase in wholesale prices. Full analysis of June’s Used Vehicle Retention Index is available on Black Book’s website.
Auction sales volume has returned to pre-COVID-19 levels, with most auctions continuing to operate in a digital only environment. ADESA led the way in the battle of the larger auction chains, initially reopening select physical auctions followed by Manheim. Both now allow sellers to represent their vehicles on the block and allow buyers in lane for live bidding at designated auctions around the country. Late yesterday, Manheim announced that an additional 13 locations were being added to its in-lane bidding pilot, bringing them to 30 total participating locations. Within these Digital Block formats, vehicles still aren’t crossing the lanes, but buyers can return to the lane to do their bidding in front of a live auctioneer. The dealer participation in this new option hasn’t been as high as we’ve seen at the independent auctions operating traditional physical sales, but the buyers we speak with that are utilizing this hybrid format are reporting they are happy to be back on the lanes. As supply continues to grow, we are concerned with both the throughput at major auctions and with the direct to dealer channel 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 1.31 million new jobless claims. Since March, we have seen 16 consecutive weeks of record level layoffs and furloughs.
In the early stages of the crisis, the US unemployment rate in April skyrocketed to 14.7%, the highest monthly rate since the Great Depression. The May unemployment level decreased to 13.3% due to the success of the Federal Paycheck Protection Program (PPP) and other stimulus measures enacted in part by the Federal Reserve and Government. As the country and economy continued to reopen during the early part of June, the monthly unemployment numbers eased further to 11.1%. The Labor Bureau also noted in its reports that there was a classification error in its surveys, and the real unemployment numbers were actually higher for each month since March, as illustrated below.
Note that monthly unemployment numbers are based on a snapshot from mid-month, but the last several weeks of June suggest that conditions actually worsened due to the dramatic increase and spike in COVID-19 cases, and the corresponding reopening slowing as a result. There is also concern that without further federal stimulus, these gains will be temporary and employment numbers may deteriorate, as the PPP expired on June 30th. According to a recently released CBO report, “the unemployment rate is projected to peak at over 14 percent in the third quarter of this year” before declining in the fourth quarter.
This recession is very different and unprecedented in the labor market – reflecting an almost instantaneous jump in unemployment with projected fast growth within a year. The graph below compares unemployment rates for the last several major recessions. The horizontal (x) axis is an offset (in months) from the beginning of the recession.
Although we have seen a reduction in unemployment, the initial economic shock and job losses have created a deep hole for us to dig ourselves out of. Between February and the end of June, the nation lost close to 14.7 million jobs.
With a weakening of the economy and the increase of new COVID-19 cases across the South, now expanding to other hot spots across the country, consumer confidence remains low. The University of Michigan’s Monthly Consumer Sentiment Index in February was 101 points. As the COVID-19 pandemic spread across US, the index dropped to 71.8 points in April and increased slightly to 72.3 points in May. 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.” With these one-time stimulus payments and extended unemployment benefits helping the economy, the index for June increased further to 78.1. The gains, however, were not uniform across the country. With a significant reduction in the number of COVID-19 cases, the Northeast region led the way with a record 19.1 points month-over-month jump, while the Southern region rose just 0.5 points due to the dangerous increase in numbers of new infections and fear of further shutdowns.
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 -35.5 percent on July 9.”
The overall weakening of the economy is causing demand for vehicle purchases to decline. Without a substantial second federal stimulus later this summer, it is expected that the demand for used vehicles will deteriorate.
Gasoline prices reversed the May trend, and started to increase, up $0.41 since the lowest point at the end of April, to $2.18 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 (we did hear that Hertz sold a chunk of inventory to another rental competitor recently) ). In addition, lenders expect a significant increase in delinquencies and repossessions over the upcoming months as the economy continues to feel the effects of 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 – about 7% of all accounts were in hardship in May (double the April numbers and 18 times higher than a year ago). The number of ‘hardships’ increased across all risk tiers.
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 (e.g. according to the recent CBO economic outlook report, the unemployment rate will not return to pre-COVID levels for at least a decade), we still project that wholesale vehicle 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
- The trend we have seen over the last month continues with strong sales and even stronger prices. No-sales continued to increase marginally this past week as sellers held firm to floors and buyers have begun to show some restraint.
- The deep pockets of the larger buyers like Carmax, Carvana, along with the larger franchised stores, are making it hard on the smaller buyers as the lack of funds required to secure inventory is leaving them unable to purchase.
- Even with the success that has been experienced with the all-digital platform, we’ve spoken to many dealers who are pressing for more auctions to offer physical auctions. In some cases, this is driving them to seek out both independent auctions and more nontraditional channels to source inventory.
- With the fast transition to all-digital sales, dealers are having to rely on auctions condition reporting more than ever as part of their buying decision process. Unfortunately, staffing at the auctions isn’t back to pre-COVID levels and this is leaving dealers frustrated with condition report inaccuracies and delays in arbitration.
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 and the need to backfill, 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. The red line is the base line, any dots above the line indicate higher amounts of sales than prior year. You can easily see just how far we have come since the April lows.
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 and have now stabilized. Bidding activity isn’t slowing down, but no-sales have slightly increased over the last few weeks as sellers are holding firm to floors, but buyers are exercising caution to not get loaded up in high priced inventory if the market takes a turn. Overall conversion rates remain consistent with a Springtime market instead of mid-July. 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 1.70% this past week. For the first time since the pandemic started, all car segments experienced increases, with the most notable increases being the Near Luxury Car and Compact Car segment with increases greater than 2%. The Sporty Car segment came in just a little below at a 1.96% increase. When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 1.24% last week with all segments increasing, including a small increase by Full-Size Vans that have been stable, with only small declines throughout the pandemic. The Sub-Compact Crossover and Small Pickup segments led the increases for the Truck/SUV segments with increases greater than 2%. Compact Crossovers were not far behind with a 1.95% increase.
The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans for the last several months. Last week, the overall market appreciated by 1.41%. We have now experienced seven weeks of overall market rebounding with consistent week-over-week increases in almost all segments.
Year-Over-Year View on Wholesale Prices
The graph above compares 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 in April of 6.9 points since launching the Index. As we entered July, wholesale prices continued the rebound that began during the second half of May and continued through the month of June, with June’s Retention Index climbing back to pre-COVID-19 levels with a record jump of 9.1 points.
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 over the next six months, but will start recovering afterwards, based on our most likely economic scenario. One of the main differences between the current and 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 – Sub-Compact Luxury Crossovers
The Sub-Compact Luxury Crossover segment continues to grow in popularity in the US as consumer demand has shifted market share from cars to crossovers. Popular models in this segment include BMW X1, Mercedes-Benz GLA, Jaguar E-Pace, Cadillac XT4, Lexus UX, and Audi Q3. Consumers desire comfort and functionality in crossovers and SUVs with the improved ingress/egress and additional cargo space. Manufacturers have adjusted their portfolio offerings to compensate for this change by reducing the production of cars and increasing the volume of crossovers/SUVs. We expect strength to remain in these segments as OEMs continue to pursue methods of increasing market share, improving residual values, and ultimately maximizing profit. All brand tiers (mainstream, near-luxury, and luxury brands) are now competing within the sub-compact class.
This segment is a natural choice for electrification, and many OEMs have come to market or announced plans to introduce BEV and PHEV options. There are several new BEV entries in this segment, creating friction and heating up the competitive space. BEV units are projected to continue being costly compared to ICE vehicles, thus requiring a high level of incentives in order to maintain sales objectives. Future BEV entrants include Mercedes-Benz EQA, Audi Q4 E-Tron, and Volkswagen ID.4.
New sales in small crossover segments continue to grow as consumers switch from smaller sedans. The number of used units is increasing and creating downward pressure on wholesale values. We project that wholesale prices (across all powertrains) will decline in the next 4-5 years by as much as 10%.
Recent Depreciation Rates
Prior to COVID-19 closures, the values of Sub-Compact Crossovers, particularly the Luxury segment, were on the rise. This quickly changed when the pandemic forced everyone home and fuel prices were rapidly dropping. Similar to the car segments, this smaller, fuel-efficient segment was hit hard when fuel prices dropped however quickly rebounded. As prices began their climb back from the lows experienced at the onset of the pandemic, the Sub-Compact Luxury segment was one of the early segments to lead with increasing values, with many weeks of positive gains exceeding the level of the overall truck/crossover market.
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%. We saw a substantial improvement in prices during the last two weeks of May, and the monthly decrease was limited to only -1.5%. As we entered June, wholesale prices continued to increase, and the overall market appreciated by a record 5.7%. As a comparison, last year’s prices declined by 0.9% over the same period.
Black Book’s July Published Residual Values (dashed lines) reflect a new economic reality. Once the temporary strengthening in June passes, we project the values to stay below pre-COVID-19 forecast over the next two years, with the deepest declines expected over the next six months. The green line represents our most-likely economic scenario, which does not include a possible second wave of COVID-19, as well as 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, wholesale prices will be approximately 10% 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. Additionally, we project that newer (zero- to one-year old models) will retain their strength in the near future due to continuous shortage of new inventory.
Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023)
The effects of the pandemic will continue to be felt 36 months from now. We continue to project that values will return to the pre-COVID-19 baseline as used supply will decline due to 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 between 15% and 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.
Used Retail Prices
In the age of proliferation and ‘no-haggle pricing’ for used-vehicle retailing, asking prices accurately measure trends in the retail space. From the peak in early April until the end of June, retail listing prices decreased by about 4%. Since the second week of June, we saw a temporary stabilization of used retail prices fueled by higher consumer demand due to stimulus payments and the federal Paycheck Protection Program (PPP). We expect retail prices to decline later in the summer as stimulus payments are exhausted and the protection in PPP expire.
- Inventory, inventory, inventory – that is the topic every dealer is talking about right now. Whether they are concerned about new or used, inventory concerns are top of mind. For most, concerns revolve around the lack of new inventory, and for others, it is the price they are having to pay to purchase used inventory.
- Smaller dealers are struggling to secure inventory as they are having to bid against the larger players with deeper pockets, like Carmax, Carvana, and the larger franchised dealers. The dealers that can finance in-house are making their money on the financing, but the smaller outfits that rely on cash or outside financing are having a harder time making money. The margin between wholesale and retail has narrowed significantly, and smaller players are very hesitant to load up on inventory at these high prices for fear the market will turn.
- On the new side, most of the deliveries that dealers are getting are not staying in inventory long. This is particularly true if they receive a shipment of Full-Size Pickup trucks. The OEM incentives are not as generous as they were at the onset of the pandemic, but that hasn’t stopped the few new units that dealers do receive from selling quickly.
Retail vs. Wholesale Trends
Each week, members of the Black Book automotive analyst team, data science team and executive leadership team speak with no less than 30 dealers, along with buyer and seller representatives, wholesalers and others, who represent hundreds of franchise and independent dealers nationwide. These industry experts, along with experts we speak with from leading fleet management and rental car companies, auction leadership, and other industry experts, help to clarify and connect the dots between the wholesale and retail markets, adding to the insights our data reveals
Since the start of the pandemic, we have been observing different trends in wholesale and retail prices (see graph below). In April and May, wholesale prices declined at a higher rate compared to retail prices. As margins grew, dealers reported healthy profits on a per vehicle basis. Retail prices displayed stickiness on the way down. Similarly, as wholesale prices came roaring back to pre-COVID-19 levels, retail prices are slow to recover, exhibiting the same stickiness on the way up. As wholesale to retail margins shrink, it is even more important for dealers to stay up to date on market movements. We are seeing this trend play out on dealership lots, where retail asking prices are not increasing at the same levels as wholesale transaction prices. This means dealers are paying more at auctions and through wholesale channels, but those increased wholesale acquisition prices, as a percentage, are not flowing through to the retail lots and online listings, and ultimately to the consumer. The main driver of the slow increase in retail prices, based on our conversations with dealers, is simply the fear of sitting on inventory for too long and the market making a quick reversal, which leaves them stuck with a vehicle they paid too much for. Dealer sentiment is quite clear—if they are going to pay up for a vehicle in this environment, they are choosing to turn them quickly, even with less margin than normal, to ensure they are not caught with high priced inventory when the market does shift. There is no long game here. There is simply a need to fulfill demand in a risk filled environment.
The graph below shows this retail / wholesale dynamic since the start of the year. Prices are indexed to the first week. The black line is Black Book’s retention index (not adjusted for seasonality). It 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 vehicle age, mileage, and condition. The blue line is a retail index – average listing price of available retail inventory adjusted for mileage.
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 six months of the year compared to last year (with a 27% YOY decline in June as most states started to lift shelter-in-place orders). Even as OEMs are restarting assembly lines, there are significant challenges ahead in order to return to a normalized production schedule as we reported in previous updates. US manufacturers are planning to get back to pre-COVID-19 levels in July as new production protocols and supply chain disruption slowed down the re-opening. The graph below shows our current projections for new vehicles sales for the rest of 2020.
Due to continuous production disruption and much weaker demand due to economic slow-down, we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 12.7mm units in our base economic scenario. In a deep economic recession scenario, we project a 40% drop in new sales in 2020 to 10.2mm units as economy dips into a prolonged recession.
In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years.
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 able 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 over 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 scrutinize future vehicle 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 will continue 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.