With inventory already reeling from supply issues, Hurricane Ida, which pummeled Louisiana and the Northeast last week, will dig the auto industry into an even deeper hole.
For more than a year, vehicle production has been strained. Plant closures related to the COVID-19 pandemic and the ongoing computer chip shortage have stymied vehicle supply. The volume of unsold new vehicles in the U.S. totaled 1.2 million units as of July 31, down from 1.3 million at the end of June, according to Cox Automotive. At the start of August, inventories were running 53% below 2020 levels and 68% below 2019 levels, Cox noted.
Meanwhile, vehicles sales are getting pinched. The Bureau of Economic Analysis estimated an August SAAR of 13.06 million units, down 10.7% from the July sales rate, and down 14.4% from August 2020. The consensus SAAR estimate for August had been 15.0 million.
With consumers scrambling for vehicles, OEMs have been tightening the reins on incentives. Average incentives on Daimler AG vehicles fell to $3,226 in July from $5,560 in July 2020, while Ford Motor Co. incentives dropped to $2,251 from $4,072 in that same period, according to Truecar. General Motors and Stellantis NV also recorded 40% declines in incentives year over year. Undoubtedly, incentives will continue to dwindle as inventory levels decline.
Enter Hurricane Ida. The effects of that storm will surely exacerbate the industry’s inventory woes. Take a look at the auto damage incurred by some of the hurricanes in recent history. Hurricane Harvey, which submerged parts of the Texas Gulf Coast in 2017, likely damaged the greatest number of vehicles — about 1 million.
In the months immediately following Harvey, used-vehicle values climbed as consumers seeking replacement vehicles caused demand — and prices — to surge. Though only a handful of Texas cities were affected by the hurricane, the effects reverberated throughout the country. At the time, the Manheim Used Vehicle Value Index rose to 134.9 in September from 131.3 in August. The index climbed further in October to 136.3.
The higher values were attributed to replacement demand combined with a reduction in available supply, which caused auction inventories to tighten. Supply was pulled from other regions, creating widespread impact to the wholesale market.
Similar scenarios played out when Hurricane Sandy shellacked the East Coast in 2012, soaking about 250,000 vehicles, and when Hurricane Katrina pummeled Louisiana in 2005, destroying about 300,000 cars. Following each of those storms, inventory tightened and prices climbed while consumers sought replacement vehicles.
As with the other storms, dealerships, too, were damaged by the floodwaters and wind gusts of Hurricane Ida. Often, when dealers have warning about impending storms, they bring their vehicles to higher ground or to off-site locations. But in New York and New Jersey, for instance, the torrential downpours last week came at such a fast clip that dealers had no time to protect inventory from rising water. Louisiana dealers, meanwhile, still face power outages that are slated to continue through at least mid-month. As such, the availability of replacement vehicles will remain sluggish.
Practically speaking, vehicle values will become further out of whack. Though the Manheim Index dropped a few points in June and July, it had been hovering around 200 at the start of the summer. To put this in perspective, we have to rewind to the Index’s baseline, which was January 1995. In a nutshell, auction values these days are double what they were in 1995.
But that rate of increase far outpaces new-vehicle pricing. For instance, a base-model Toyota Camry cost about $20,000 in 1995. Fast-forward to 2021, and a Camry hovers around $30,000. That ratio is equivalent to a Manheim Index level of 150. Yet, the index in August was 193.7. That 29.1% premium would equal a $38,740 price tag on today’s Camry.
Constricted vehicle supply — combined with rising demand — will continue to hamstring the market and create fallout for lenders and lessors. The Manheim Index will likely surpass the 200-mark at least a couple more times before yearend.
While OEMs are expecting lower inventory levels to become the new normal, financiers should be prepared for higher vehicle values to become the new normal, as well.
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