BLACK BOOK – Here is a quick recap of another busy week in the automotive world:
- Wholesale prices, fueled by shortages of new and used inventory, in addition to auctions’ throughput limitations, continued their ascent at record rates
- Retail listing prices showed a much slower increase, continuing the trend of shrinking margins for retail dealers
- Hertz was able to achieve an agreement with creditors to avoid a fire-sale of their fleet in 2020; instead they will gradually sell off about 180k units over the next five months
- The number of automotive loans classified as “in hardship” continue to climb, and most lenders expect a dramatic increase in the number of repossessions in the next six months.
Last Week’s Highlights from the Wholesale Market
July values continue their climb. We’ve seen wholesale prices increase by 5.8% this month as the market continues to be plagued by shortages of both used and new inventory. Volume-weighted, overall car and truck segments both showed gains for the ninth week in a row, increasing 1.46% overall this week (compared to 1.45% the prior week). As for specifics, the overall car segments increased by 1.71% (compared to 1.80% the prior week) and the overall trucks and SUV segments increased again this past week at 1.31% (compared to 1.24% the prior week).
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 nine weeks of overall market rebounding with consistent week-over-week increases in almost all segments.
News from the Retail World (Used and New)
- Days’ supply for most lots is hovering around the low to mid-30 days for used cars, which continues to put increasing pressure on the prices dealers are paying at auction in their efforts to secure inventory.
- In general, we have seen a significant drop in the number of used vehicles listed for sale from dealers, with a more than 20% decrease in the amount of advertised inventory just since the beginning of the year.
- The divide continues to grow between the smaller dealers and the larger outfits, as the money required to purchase inventory increases and retail pricing fails to increase at the same pace. Larger dealers are relying on financing and add-on services as a revenue stream to overcome thinning retail margins, but this is hurting smaller dealers that do not have as many ancillary products and services to offer.
- Supply chain disruptions continue to plague the production of new inventory. Ford and Volkswagen were in the news this past week with troubles in Mexico.
- Demonstrators in Mexico have blocked a railway that is critical for moving auto parts that Ford needs in their production facilities.
- Volkswagen is facing a potential strike in mid-August over unionized workers demand for a 12% increase in wages.
- Volvo is expected to re-open their Ridgeville, SC plant, responsible for production of the Volvo S60, this week after a three-week shutdown for summer. Most manufacturers canceled their summer shutdowns, but Volvo proceeded with their planned stoppage due to dwindling demand for sedans.
Economic Conditions Update
In this week’s report, we follow developments in the economy as the COVID-19 pandemic continues to expand in magnitude outside of Northeastern states.
- It is projected that consumer confidence will drop in July, although we saw improvements in the Northeastern part of the country in June, as those states’ strict policies helped to contain the spread of COVID-19.
- Weekly initial unemployment claims rose this week (reversing a trend from the initial jump in late March) and continue to stay at the record levels – the 18th straight week in which initial claims totaled more than one million.
- The number of automotive accounts in hardship increased again in June to record levels, according to a recently released monthly report by TransUnion – about 7.2% of all accounts were in hardship in June (double the April numbers and 18 times higher than a year ago). The number of ‘hardships’ increased across all risk tiers.
- As many states slowed or reversed re-opening, it is expected that unemployment will increase over the next several months and will stay above 10% well into 2021.
- Gas prices stabilized over the last several weeks.
- Seasonally adjusted annual real GDP growth rate is projected to stay negative in the third quarter as economic activity is slowly recovering from shutdowns in the second quarter.
- Business travel is expected to remain low for the foreseeable future, according to projections in Delta Airline’s second quarter earnings call. This will hamper recovery in the car rental business, which is concentrated at the airports.
- Without a substantial second federal stimulus, demand for used vehicles is expected to deteriorate. Current proposals in the Senate and House that would be beneficial to stimulate demand in the automotive sector include:
- Second round of stimulus checks
- Extended federal unemployment benefits – current extension runs out runs out before July 31st, and ran out last week in some states.
What Comes Next
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. The big news from last week was a court approved short-term resolution of Hertz’s standoff with its lenders – Hertz will be able to operate and reduce their fleet in the next six months. It is expected that over 180,000 rental units will be sold off in 2020 as Hertz right-sizes its fleet to match demand. 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. With much weaker retail demand and projected oversupply of used inventory, we forecast a significant drop in wholesale prices this fall relative to the heights seen in recent weeks.
Longer Term View
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.Page Break
Since the beginning of April, weekly initial unemployment claims remained at record levels. Last week, the Labor Department reported that the US added 1.42 million new jobless claims (an increase of 109,000 from the week before). Since March, we have seen 18 consecutive weeks of record level layoffs and furloughs. The graph below compares weekly initial unemployment claims from the current recession against the Great Recession of 2007 – 2009. The severity and speed of job losses is unprecedented. The horizontal (x) axis is an offset (in months) from the beginning of the recession.
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 worsened due to the dramatic increase and spike in COVID-19 cases, which lead to reopening slowing. 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, which is now expanding to other hot spots across the country, consumer confidence dropped back to the lows of April. The University of Michigan’s Monthly Consumer Sentiment Index for July, released last week, suggests a decrease to 73.2 points. The report also predicts a further weakening in consumer confidence: “unfortunately, declines are more likely in the months ahead as the coronavirus spreads and causes continued economic harm, social disruptions, and permanent scarring.”
Not surprisingly, consumer confidence has been on a bit of a rollercoaster the last five months. At the beginning of the year, it was strong – 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 point 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 -34.3 percent on July 27th.” The projections were stable in the last four weeks.
Delinquencies in Automotive Lending
The number of accounts in ‘hardship’ jumped substantially in April and kept increasing through June across all risk groups, according to the Monthly Industry Snapshot by TransUnion. Currently, more than 7% of all accounts are in hardship – this is almost a 1,700% increase from last year. The increases are across all risk tiers. As deferrals expire in the upcoming month, coupled with a high unemployment rate, lenders expect a large portion of these ‘hardships’ to become delinquencies. According to “Senior Loan Officer Opinion Survey on Bank Lending Practices” from the Federal Reserve, lenders started to tighten standards on auto loans in the first half of 2020.
Gasoline prices reversed the May trend and started to increase. Since the lowest point at the end of April, prices are up $0.41, to $2.19 per gallon last week, according to the U.S. Energy Information Administration.
Current Wholesale Market Overview
- Two weeks ago, we noticed an increase in late model, low mileage, high condition score vehicles running in the lanes, and the trend continued this past week. These vehicles continue to show strength in their values because they are a good substitute for consumers that are in the market for a new vehicle. The expectation is that this trend will continue until new production is able to catch up. The timeline for return to normal levels varies by manufacturer and is based on locations of their manufacturing facilities.
- The portion of the market that showed some stabilization and possible softening are the “edgier” units – those with higher mileage and lower condition scores. At the onset of the pandemic the lower price point of these vehicles made them desirable, but this is a portion of the market that is showing some stability now.
- Auction volume is showing some regionality in trends, with volume increasing, particularly of rental units, in portions of the country that have been harder hit by spikes in COVID-19 cases.
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, 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, and any dots above the line indicate higher amounts of sales than the prior year. You can easily see just how far we have come since April’s 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. Independents that have been operating a traditional physical sale continue to report the highest sale rates. 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 1.71% this past week. The largest gains were seen by the Near Luxury and Sporty Car segments with increases exceeding 2%. Compact, Mid-Size, Full-Size, and Luxury weren’t far behind with increases exceeding 1.5%. The week-over-week gains continue to be at levels that haven’t been recorded before and have now brought us back to pricing levels seen this same time last year on a per vehicle basis, particularly on some Sporty and Compact Cars that have consistently increased by large amounts each week. When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 1.31% last week. After two weeks of all segments increasing, two segments reported stability this past week, the Minivan and Full-Size Van segments both had minimal declines. Throughout the pandemic, the behavior of the Full-Size Van segment has been following a more traditional seasonal pattern of small up and down movement. However, the Minivan segment has reacted much like some of the other segments with large declines at the onset of the stay-at-home orders and then a steep rebound when consumer demand increased.
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. We project that July’s Index value will jump above 2019 as wholesale prices continue their climb through the month.
During the last recession (2007-2009), the Index declined by about 15 points in a span of 12 months before recovery started. We project that during the current recession, the Index will decline over the next six months before it starts to recover, 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 – Mid-Size Cars
The Mid-Size Car (MSC) segment has evolved over the past decade as shifts in consumer preferences have pushed buyers to Crossovers and SUVs. We’ve seen the retirement of models like the Chrysler 200, Dodge Avenger, Mitsubishi Galant, and Suzuki Kizashi over the years, but more recently we’ve seen domestic manufacturers discontinue once popular models such as the Ford Fusion and Buick LaCrosse. At its high point, MSC had a market share of 15-17% between 2008-2013, but the change in consumer tastes has driven the 2020 market share down to 8%. Popular models in this segment include Toyota Camry, Honda Accord, Nissan Altima, Hyundai Sonata, and Kia Optima (now known as the Kia K5).
MSC has long been a common source for rental companies, but that has also changed with the shift in consumer preferences. Up until 2018, MSC was the biggest source of rental vehicles, but that top spot is now held by the Compact Crossover/SUV segment with MSC coming in second. The highest volume rental units have historically been Chevrolet Malibu, Toyota Camry, Ford Fusion, Kia Optima, Hyundai Sonata, and Volkswagen Passat.
The graph below shows the market share of each segment in the rental fleet space. Current share for MSC is roughly 15%, much lower than the high of 25% eight years ago.
Black Book’s Seasonally Adjusted Retention Index for MSC fared much better than many other segments during the last recession, reaching its lowest level of 98.9 in May 2009, compared to a low of 76.1 in December 2008 for the Compact Crossover segment. As for the COVID-19 impact, the Index fell –8.4% to 107.5 in April but made a slight improvement in May to 107.9 as we saw prices rebound after stay-at-home orders began to be relaxed across the country. In June, as prices continued their rebound, the Index increased an astounding 9.2% to 117.9, higher than the pre-COVID-19 February Index reading of 117.4. The anticipation is that, based on the continued increases in wholesale values throughout July, the Index will increase again for this month. We will have those results to report in our next market update.
Recent Depreciation Rates
MSC has moved in sync with the overall car segment average for much of the year, with slightly steeper depreciation through the hardest COVID-19-impacted month of April. As for the rebound in values, the segment has been tracking along with the overall car market. The largest gains for the car segments was Compact Cars, which had more ground to gain after experiencing steeper declines at the start of the pandemic.
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%. In 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. As we are nearing the end of July, wholesale prices already increased by 5.9% and continue to increase. We project that by the end of the month, prices will be above pre-COVID-19 projections.
Short-Term Outlook (Fall of 2020)
Black Book’s August Published Residual Values (dashed lines) reflect a new economic reality. Once the temporary strengthening in June-July passes, we project values to stay below our 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).
We project a drop in wholesale prices compared to a pre-COVID-19 baseline this fall, as the US economy suffers through the effects of COVID-19. We anticipate that, later this fall, wholesale prices will be approximately 5% to 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 in good condition will retain their strength in the near future due to continuous shortage of new inventory.
Long-Term Projections (36-Month Residual Values, Fall of 2023)
The effects of the pandemic will continue to be felt 36 months from now. We 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 decrease in wholesale prices of up to 15% later in the 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 Vertical
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 stabilization of used retail prices fueled by higher consumer demand due to stimulus payments, the federal Paycheck Protection Program (PPP), and limited used and new inventory. In the last 6 weeks, used retail prices rebounded by about 2.3%. We expect used retail prices to decline later in the summer as stimulus payments are exhausted and the protection in PPP expire.
Used Retail Inventory
Many dealers continue to report a shortage of used inventory in the wholesale marketplace. As a result, from the peak in February, we’ve seen a decline in the number of used retail listings by about 25%. The true shortage of vehicles is probably not as severe as this decline would lead you to believe, as many dealers sell some of their best inventory in the first several days before listing them online. Nevertheless, the shortage of used inventory helps keep retail prices elevated even in the weak economic conditions.
The graph below shows the weekly average of the number of retail listings collected by Black Book, indexed to the first week of the year. We see a continuous decline in the numbers starting at the beginning of May as economy started to open in the states outside of the Northeast.
- Days’ supply for most lots is hovering around the low to mid-30 days for used cars, which continues to put upward pressure on the values dealers are having to pay at the auction in their efforts to secure inventory.
- The divide continues to grow between the smaller dealers and the larger outfits as the money required to purchase inventory increases and retail fails to increase at the same pace. The larger dealers are relying on financing and add-on services as a revenue stream to overcome the small retail margins, but this is hurting the smaller dealers that do not have these services to offer.
- Supply chain disruptions continue to plague the production of new inventory. Ford and Volkswagen were all in the news this past week with troubles in Mexico.
- Demonstrators in Mexico have blocked a railway that is critical for moving auto parts that Ford needs in their production.
- Volkswagen is facing a potential strike in mid-August over unionized workers demand for a 12% increase in wages.
- Volvo is expected to re-open its Ridgeville, SC plant, responsible for production of the Volvo S60, this week after a three-week shutdown for summer. Most manufacturers canceled their summer shutdowns, but Volvo proceeded with their planned stoppage due to dwindling demand for sedans.
- The effects of the shutdowns a couple of months ago continue to ripple through the automotive industry. The all-new Genesis GV80 and redesigned Genesis G80 are going to be delayed until fall due to delays in getting the vehicles emissions certified.
Retail vs. Wholesale Prices 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 both 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 level 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, coupled with the added risk that the market makes 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.
CPO Retail Sales
Certified Pre-Owned has grown in popularity as it provides consumers with an affordable used purchase option with low mileage (a typical 3 year-old CPO vehicle will have around 5,000 less miles than a similar non-CPO vehicle), but with the peace of mind that comes with a new purchase with the additional warranty. Some OEMs also offer special financing rates and terms for their CPO vehicles. For dealers, the cost to certify a vehicle is typically minimal and the return on the retail is typically greater. CPO vehicles are typically viewed as nicer condition units as there are minimum criteria a vehicle must meet to be able to be certified and these typically involve age and mileage restrictions.
There are additional benefits to consumers that purchase through some OEMs, such as GM that offers an exchange program on their Chevrolet and GMC CPO units. If the customer changes their mind within three days or 150 miles, the purchaser can exchange it for any Buick, Chevrolet, or GMC CPO vehicles.
For some dealers, there is additional incentive to CPO a certain percentage of their used inventory as it bumps up their status with the manufacturer. For example, BMW takes into consideration a dealer’s CPO sales volume when deciding on the dealership’s new car allocation.
Cost of certifying a vehicle ranges by manufacturer. Typically, for mainstream OEMs, the cost to the dealer is $500 or less per vehicle, but luxury vehicles can reach into the thousands of dollars and vary by model. In most cases, the full cost to CPO a vehicle is the responsibility of the dealer, including any reconditioning that is necessary for it to get certification.
Retail prices of CPO vehicles are generally about 3.5% higher than a similar non-CPO vehicle (adjusted for mileage). But just like the cost to CPO a vehicle, the difference varies among the segments and, for example, can climb to about 7% for near luxury sedans.
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.
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 – we expect the volume of repossessed vehicles to at least double in the next 6 months compared to last year
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. Last week, Hertz was able to secure a deal with its lenders that allows a gradual reduction of fleet – over 182,000 units will be sold over next 5 months. In addition to Hertz, we expect other rental companies will continue to reduce their fleet during the 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.
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.