Since the collapse of the new-car market in 2008, industry participants have talked about a “new normal” for car sales. The argument was that the prior 17-million-unit sales pace was inflated, and 14 million units was a more appropriate rate based on population figures and driving habits. Manufacturers have since recalculated production volumes and reduced headcount accordingly.
While adjustments were made on the new-car side, the used-car market has been strengthening. Limited availability of used cars has prompted a rise in auction values. Manheim’s Used Vehicle Value Index topped 126 in March and April, a level reached only three other times.
But what goes up must come down, lenders say, as they anticipate a decline in used-car values. The key questions, though, are when and how much.
During a session at the Auto Finance Risk Summit this week, Teresa Eller, consumer installment credit risk manager at M&T Bank, proposed that the decline might be muted. Her rationale: There may be a “new normal” for used-car values, considering the high quality of vehicles being produced these days.
Data from the J.D. Powers 2012 Vehicle Dependability Study supports Eller’s vehicle-quality claim. “Overall long-term vehicle dependability is the strongest it has ever been, and the gap between initial quality and long-term dependability continues to close,” according to J.D. Power.
The Manheim Index was set to 100 in January 1995. It closed out that year at 100.9. Last year, the index closed at 125.1. And in 11 of the past 17 years, the index has exceeded 110.
Is 115 the new baseline? 118? What’s your take?
Until fairly recently, leasing was mostly limited to the new car market. We have seen a lot of interest lately from buy-here, pay-here dealers who are contemplating lease-here, pay-here as an alternative. The residuals issue is, I think, less of a problem in this market, and there can be some significant operational advantages as well, such as (in some states) the imposition of sales or use taxes on the monthly payments rather than up front. Anyone considering leasing needs to consult legal and accounting folks, though – it isn’t just another form of financing.
I have said this ever since the used car market started to climb after the big crash; The used car market is probably one of the few purely supply and demand markets in our country with no outside interference or regulation. Ever since then the supply of quality used cars has shrunken and the demand has grown. Those two opposing forces are the reason for the huge increases we have seen in wholesale used prices. The average and miles of cars traded at new car stores is also dramatic. They are much older and higher miles than before the crash. This is all just honest market forces at work folks. I don’t expect there to me any sharp lessening of those forces for quite a while. Yes, Manheim’s baseline should be much higher. Just as with their MMR their index goes way too far back in averaging and is therefore late to report actual trends in real time. Some adjustments need to be made for the reality of the market. Just my opinion.
Thanks for the comment, Daryl. If you were re-setting the index, what would be your starting point?
Marcie, Its hard for me to comment on that question. I just don’t know enough about the actual math variables that go into their equation and I am least of all NOT a math whiz. All of these figures and indexes need to viewed as a broad guide only. Example: In our Florida market MMR for the region is almost in all cases either higher or lower than the regional average of which Florida is part. So if we want to know what MMR is for our market we need to look at the actual sales of that unit in Florida and not take the average for Southeast. I believe lots of people just see the average and use it. The actual Florida numbers rarely reflect anywhere close to that average. I have often said that Manheim needs to break Florida out as its own region for MMR. We have more dealer auction lanes in this state than any other state and our market is that much different than any other state. Pulling Florida out of MMR Southeast would be good for everyone. Manheim’s Index could be reset and probably should be reset to a more realistic baseline. I just don’t know how to do that.