In the July episode of the Industry Pulse, JD Power's Mike Buckingham, managing director of PIN auto finance, discusses second-quarter inventory levels, incentive spend and vehicle sales against the backdrop of an ever-changing market. To view the presentation deck, <a href="https://www.autofinancenews.net/wp-content/uploads/2021/07/Industry-Pulse-July-2021-Mike-Buckingham-Presentation.pptx" target="_blank" rel="noopener">click here</a>. [toggle title="TRANSCRIPT"] Hello, everyone, and welcome to the July episode of the industry pulse, a monthly market update on trends in auto finance in credit quality, credit demand, residual values, regulatory compliance, macro economics and more. It is my pleasure to introduce Mike Buckingham, Managing Director of Penn auto finance at JD Power, who's returning for his third appearance on the industry bulls, Mike. It's always a pleasure to have you on the program. And welcome back. Yeah, thank you, Joey. And in fact, JJ and the team for allowing us to present to you today, folks, good afternoon, I would say I'll mark it down as today's July 27. I think all of us are aware, we've had some rapid changes week by week and month by month. So I'll just put that date on there. I've done this, as Julie said a couple of times before, today, take you a presentation really three parts. Us automotive, talk about new and then us vehicle sales, as well as providing some insights. And let me move the screen sorry. There we go. So there's the there's the agenda for the day, start off with the new auto sales and data insights. A few charts here, I think most of them are very, very interesting. First and foremost, upper left, you can see the daily selling rate. The blue bar is 2020. You can see after the huge trough in April of 20, the sales rate continued to climb. As we look at 21 you can see still very strong January, obviously a more normal march in April, but sales are the daily selling rate is starting to come down. And I would ask you to move your eyes right below that box on the lower left. And that speaks to retail inventory. Blue is 21. Green is I'm sorry, blue is 20. Green is 21. The available inventory of dealerships today is basically half of what it was last year. A few other points on here. See the transaction prices. I mean record setting. We'll talk about that. in setting up this meeting, I was telling Joey about some of the you know absolute pricing look at the lower middle sales at MSRP. and higher 44% of vehicles selling this year were so either at MSRP or higher. Upper right incentive spending incredible story and you can see what it looked like March and April in May last year where the OEMs really started to attack the market and try to get us out of COVID at least get the auto sales moving again. And now you're looking at it. I mean, incentive spending is almost cut in half. Lower right, a new chart everybody on here. These are new energy vehicles. We define them as EBS or plug in hybrids over double the percent market share right now running four and a half percent this time last year, slightly over 2%. Some other pieces in here, industry sales performance you can see looking left to right we have June industry sales in the middle, the June SAR and our annual forecast as well as pardon me the year to date industry sales, I jumped the page and I apologize for that, as I'm trying to take my face out of the box here. Just some some points on there. A good June, we saw total sales up 16% year over year. The highlight number I guess you could say as a non retails up 59%. But the base was really really low. Probably a better compared to Where's look at 2019. And there you can see we were almost even on June and the retail sales fleet was about half of what it was in 2019. As we look at the SAR and the annual forecasts, we've moved up our numbers again, we see total industry new vehicle sales 16 point 4 million if you're looking at 2019 1715. But when you dig down a little bit deeper, you can see retail forecasting of 14.1 is actually higher than the 13.5 in 2019. So it's been a great year a great rebound for retail sales. The overall sales the headline number may lag but keep in mind that sleep and for the most part, that fleet daily rental is low margin business for the manufacturer. So we'll talk later but we think this is all time record setting profitability for the OEMs some additional pardon the additional dynamics from June. You can see that the segment mixes for the month in the Year to date side. On the right hand side, you know, we see overall compacts are about a percent share and 9%. We saw some movement in compact SUV falling close to two points share still a very strong 16. And we also saw the premium segments rise about 1% and share to 17. What I've got to tell you is that the chart here is a little bit deceiving. Because so much of this is really functions of inventory, not functions of normality. Clearly spot shortages. If you look large pickup, for example, you've got to remember where we were at last year, heavy incentives and huge inventories. What's happened, the biggest number is inventory levels are nowhere near if you go out and visit your local, you know, Ram dealer, Ford dealer, GM, or Chevy do GMC or Chevy do it, you'll see their lots are almost bare relative to where they at and that that is certainly influencing the market dynamics right now. A few more charts, we'll drill down again, instead of spending per unit, it really keeps dropping is an amazing number. It's fallen 44%, now down about 2400 a unit. And then on the right hand side, you can see incentive spending as a percentage of MSRP fell to little under 6%. This time last year, we had months where we were just about 12% incentives related to MSRP. In the middle, what's happening while the incentive change really has nothing to do with segment mix, it's all just the the OEMs dialing back to incentives. A couple more slides, consumer fake financing transaction prices again, you can see how strong they are now, right at 40,000 or 39. Nine, we see that breaking next month in the middle of talks about how did we get there? How did we get so high on a year over year basis. The segment mix had really no influence on $84. It's just pure pricing. You know dealers are commanding much stronger prices, you saw a percentage of over MSRP MSRP or above. It's a seller's market, as they say, when we talk about used cars, the same phenomena was going on there. And then lastly, consumer expenditures grew 9.3 billion up 27% from last year, and really a function, some of it retail sales. But a greater piece of that is higher consumer consumer facing transaction prices. Here's our Health ScoreCard. I won't take you through all the boxes, just some highlights on the right hand side. As I said before strong retail sales. There's been a huge lift in transaction prices. Retail sales are soaring. Look at the dealer gross profit. So I will look at that in 2019. Your gross profit per unit was $276. This past month, almost 17 $100 and incredible change a blow that f&i income. There's been some headlines as the Publix and have reported their results media's picked up on it. You've seen some of the headlines with some of the big publics or maybe add on your 2000 per unit. While they're up we don't see really a measurable change you can say about up 15% from 2019. But nowhere near the lift that we've seen in vehicle grosses. What our health indicator, again, huge reduction in incentives, we do see a declining lease mix out there. leasing is costly to incentivize. And we see the traditional luxury folks are still leasing. But the non luxury arena, quite frankly, the OEMs don't want to support residual enhancements or pricing. So they're letting that their share of leasing falling and it's not doing any harm to their overall sales. Our terms continue to increase I talked to Joey and the upfront. If you look year over year, 72 months and beyond 84 months, we have fallen slightly but the real comparison would be back to 2019. When we were at month end june of 2020, you got to keep in mind most if not all the OEMs had very aggressive 84 month programs, some of which you had not been financing at four months before so they greatly influenced that. But if you get in again look at 72 month and 84 month and beyond. When we do the 19 to 21 compares you can see it is up. subprime is compressed, there's a sub 650 mix. We'll talk a little bit more in the auto phi section ltvs declined greatly. And again, I think the better numbers we're looking at is the 20 2019 number vs 2021, you can see a three full percentage points in overall ltvs. Trade in equity much improved. Again, I'll let you read the numbers on there, it's very strong. And the number of consumers with negative equity is falling dramatically. inventory in late inventory levels, rough at 4848 months. And you know, we're hoping we'll see the industry start to snap back rebound, its chips, and other supply chain disruptions. Just our forecast real quick. And there's a comparatives, I'd start strong, we think overall sales at 16.4 compared to almost 17. In 2019. When you compare 2019 to 2021, overall, new will be down 3.4%. But retail will be up 7%. And that's good for the dealers. That's good for the OEM. Last slide touch on her outlook. You know, we saw retail sales, really production driven versus demand. There are risks that we touched on before about the supply, train supply chain disruptions, as well as COVID restrictions. And that's a little bit concerning now, as some of the COVID cases are climbing will that make some changes, retail or profit, again, touching on best best profit ever. We're hedging our bets a little bit, but we see a continuation for the last six months of 2021. It's going to be a great year for retailers if not the best ever, and we have profit, likely their best ever as I touched on before favorable mix. We'll get a clear picture in q3. Again, watching the inventory levels, watching things like COVID interruptions that maybe impact either consumers or supply lines, or supply chains. But we see this as just a great year for the OEMs. I'm going to take a sip of water and let me take you through our use card data and insights. I want to give credit to teams Jonathan banks team at nada use card guide, as well as our team partner. Eric Lyman at ALG if you're not aware, JD Power acquired LG about nine months ago and we're happy to have Eric and his team on board and helping us. First chart us inventory. This is June 2021. This is the US vehicle Price Index. These are in monthly increments right there on a year over year basis. 36% 2020 versus 2021. And if you look, you can see we had some strong lift going into the summertime last year, just incredible numbers. There are 48 points higher than they were in December of 20. And 40, almost 42 points above the previous peak at August 28. Very, very strong. And I think I'm not telling anybody on on this webinar, anything new, monthly wholesale price performance. We saw flat pricing in June on a month over month basis. But that's a compare toward towards in June, traditionally, we see about a one and a half percent fall off on a month over month pricing in there. So we don't look at that as a problem. Maybe it's my moderating a little bit and not accelerating like it did this time last year, but still very, very strong and in good shape. Some of the hate that pardon me the segment wholesale performance across the board. Mainstream prices were mixed in June 21 versus a relative positions in 21. You know, as we've seen the trend years past, generally mainstream prices have outperformed premium. But this is the first month where we've seen the premium prices actually moving higher than mainstream and you can look at various segments across the board. Performance 20 versus 21. small car and large car pickup prices continue to lead in the year over year increases. a two year old segments are 46% higher than they were in 2018. You just have to pause for a second and say a 46% price increase. We see on the other hand the other mainstream and the premium prices are up anywhere between 23 and 42%. Year to date prices are very very strong. As the dealers are short on new car inventory. They're chasing down all the used cars they can and that bodes well for the consumer that is trading although the consumer might be having a MSRP if they're buying a new car. These are, pardon me wholesale versus us Price Index through the weekend in July 4. wholesale prices have increased 37% since the end of 20. outpacing the 21% increase in US vehicle prices huge can see the dealers are just chasing inventory. Everyone's lots are thin, particularly new car side. So they're out there grabbing and paying just, you know, in some cases, I might editorial say crazy prices just to get some inventory in place right there. We do see on the right hand side, the wholesale auction sales continue to run significantly lower than pre virus levels. And if you think about it, you know, the auctions you know are still strong. But what the OEMs are able to do is just really sell them online. The real portals I think everybody's seen the headlines. Basically no off lease cars are going to market there are no daily rental cars going to market because there's not a whole lot of daily rental cars out. People the dealers are snapping up all the police cars. So those are big influences on the on the auction rains. This is our annual wholesale price index forecast. After we saw prices increase six and a half percent in 2020. And rapidly rise so far, we think they're going to remain above historic levels. And we believe the overall year over year we'll see a 31% increase in in 21 relative to 2020. Again, while while pricing take one more sip of water and we'll take the pardon me final piece. This is very I specialize in auto finance originating origination data. First off start retail sales by type indirect continues to be the preferred method of choice for consumers purchasing a vehicle and a franchise auto dealer. new loan share increased four points in 2020 due to the the low OEM. Lower with me, I'm sorry, low OEM pricing and incentives as well as less leasing. As we go into 2021. You can see retail shares flat the offset to that as we see a declining leasing base in this this is on a new car side. dealers are facilitating about 84% of new vehicle finance, new vehicle purchases and 77%. On the US vehicle side. About 4% of the new vehicle sales are financed directly and about 9% of the US vehicles are sale a used vehicle sales are financed directly you can see the cash sale. Direct financing is part of cash. In our nomenclature, cash means the dealer did not facilitate in either a financial release. I talked to Joey before that a little bit slow, but we're very close to doing some demos on there. We've got a great tool we've developed in conjunction with TransUnion to bring direct lending insights to our client base in the industry. Next slide. New news. Financing by the lender segment. captive share you know is it 57% continues to be number one, but it's fallen from the 50 near 58% this time last year based in part with really the generous programs that were in q2 have gone by the wayside. captive share has fallen basically back to 2019 levels at right at the 18% Mark had gone up a little bit last year with some aggressive CPO programs. Banks have jumped in. Their share has rebounded sharply in new now that the captives have reduced the low APR offers and your bank share on us is also jumped up by points to 47%. Credit Unions on the new car side up slightly but still below their 2019 levels. But for the used car side credit unions I picked up the pace and holding steady at 21%. On the independent side, they're pretty much flat on new compared to 2020 or 21 and 20. But what we see on the US car side the independents are now about 12% or living over 12% of the market coming up from not only 20 but 2019 showed this last time the impact of the new vehicle zero APR loan mix, you can see that's the zero the 0% loans are the blue bar at the bottom. You can see tailing down huge spike in q2 still was thrown in q3 of last year, but really started to moderate in the wintertime. We don't see really any changes going on with zero incentives are down, quite frankly, the dealers and the OEMs really don't need help financial help in assistance with their limited inventories at this time. Talk about credit mix, we've seen a new vehicle side credit mix getting stronger to more prime and super prime in the past few years. On the other hand, used vehicle quality is about steady right there, low 40s in the super prime, about 17%. On the subprime side, subprime share in new at peaked in February, March 20 2020, and 11% then began to decline. We see it's stable at about 8%. I talked about this last time, much of it has to do with really the mixing in there, there's still a lot of subprime customers in the market. But the prime buyers and the super prime buyers have really come out. It started with the incentives, but just the the great new vehicles out there. Also on the subprime space, you do have more people impacted economically either loss of job loss or hours. Some of them may be reluctant to take jobs and run employment as some of the schools remain close. So there's some interesting dynamics as subprime, but it's not been shut off. We do see some lenders being careful, no one that I speak to in the industry is chasing subprime share, it's still there, there's a little bit more documentation scrutiny. ltvs are a little bit held closer in check, but everyone I talked to and that space is it's there, they're looking for some grant business ltvs I think this was a shock to some as the transaction prices have gone through the roof, everybody thought well, you know, the lenders are going to have to raise your ltvs and support these higher prices and nothing nothing could be further from the truth. In fact anything. It's it's been reduced. On the new car side, you know, we knew and use both advances continue to moderate in that 121 and up bucket. And when we look at these LTV points, please keep in mind this is a line five, all and LTV, taxes after market etc are included in that line five, we're getting ready to watch a line three calculator for some of our clients. But for right now just want to make sure everybody understands that 120 1% is all in not just a line three call. But we've seen in both segments new and use dramatically fall between 2019 and 2021 in the highest LTV buckets. Conversely, if you look the low ltvs, 90 and below have jumped jumped quite strongly in the past two years. You know we we know part of it is lender standards, but really it's higher, higher prime customer purchases. Again, this is a mixed slide by slide. We believe the decline trend will continue in 21. But the rate of decline may moderate we don't see large jumps downwards on the higher LTV buckets. Last couple of slides speak on pricing. It's been a great market for pricing. We've seen on a year to day basis, year over year comparateur new vehicle non Sabine road pricing when we say non captive we mean non captive incentivized pricing. So this is standardized pricing, whether it be from the banks, the captives, the credit unions, etc. new vehicle incentive fall 40 days 41 basis points versus 2020 on the used car side about 46%. And all the prime segments our data continues to show this is that this current pricing is the lowest in the past five years. While most of the rated decrease in all two years super prime prime continue to have the greatest decreases. And that's a function of competitive forces. With the Fed taking a more modern approach, we forecast low buy rates to stay at or near these level through 2021. We do need to keep in mind and keep an eye on those inflation numbers and things like that. You know the Fed is talking a lot about inflation, right the stock market is talking a lot about inflation. We'll see right now it seems that they're going to hold moderate and change fed pricing until 22. But you just never know. Wrap it up our 21 Auto Finance outlook outlook remains very very positive. The the anticipated elevated COVID credit losses did not materialize. Before we started today, Joe and I talked about the q2 announcement and just a number of lenders in their q2 earnings announcements spoke to positive net credit losses. I mean, I've never seen that. And I've been doing this for 40 years. That's a great story for the lenders. sales volumes have come back strong, although a little concerning as we go on q3. With inventory shortage, captive shares fallen but remains above historical levels. Banks are really now on a growth curve as low APR centers, and the aggressive CPO programs of soften credit union shares is flat and fairly stable, independent share volume bottomed out in 20. And we've seen them moving forward and 21. leasing now foam to 25%. We don't forecast much movement in the direction, credit quality credit mix remained stable ltb years are lower than pre COVID. Strong used car prices have helped to keep them lower. And pricing while at near historical lows, again, is forecast to be stable throughout 21. So there you have it. And I thank everyone on the call for their time. At the end of the presentation, just some contact information. If I or my team can help you with any of the data here, if you need contact with our pin explore team who manages all the OEM business as well as we can help you or direct you towards our ALG and use car team. So with that, I'll say thanks. I look forward to seeing folks in October at the Auto Finance summit. We'll have a booth there. And Joey pass my words on to JJ again, appreciate the opportunity to speak today. So if you got any questions, I'll I'll quit talking. I definitely have questions for you. I got to figure out how to get my There we go. All good. So a lot to unpack there. Um, again, like you said, unprecedented times for the industry. I guess, you know, if you had to kind of boil it down to you know, one thing, if that's even possible, right. You know, what, what metric Are you keeping the most eye on? Yeah, that's that. That's a tricky one. I gotta throw in a couple more, Joey. I think industry wide looking at that inventory. Can we get it back? We know chip production is coming back. You see supplier disruptions are getting better. There is a concern, though, with some of the flare ups and COVID infection does that put a damper on it? Close is number two, keeping our eye on pricing. And, you know, there's been some, you know, headline news about inflation, I think as consumers and you and I spoke, you know, used car prices are part of the CPI. But take that out. I think we've all experienced restaurants, grocery stores, consumer goods, we're seeing the pricing go up? And does that does that cause the Fed to have to, you know, tighten up and or raise raise prices? So those are probably the two I would enter enter join right there. Right. Right. And so, you know, I'm also looking kind of at like, you know, 2019 numbers. back before the pandemic, we were, you know, worried about affordability concerns is inventory and or the rising prices or sticker prices of vehicles. A concern for you? Right? Well, I think I think the elevated prices and the lower incentives are just a function of inventory, when you've got more buyers than sellers out there, and that's I would say, you know, forget the consumer, Joey, the dealers are doing some unnatural acts at the auctions buying used cars. You know, I love the quote I saw probably 45 days ago from a Nissan Dealer who was I either, if not a public part of the big chain, who said he was buying two year old used Nissan Altima is at the original MSRP. So it's, that's going to end that is going to end right there. But that just speaks to where the pricing is at the concern on the on, you know, where I said the inflation and the Fed is vehicles are affordable. He saw while the while the prices are that the cost of funds is down and dealers are, you know, willing to do 70 to 84 months to be affordable. So the affordability index hasn't changed that much. I apologize. I don't have the average average payment on there but it hasn't moved much. So that's where Are you see if there's a shock on pricing at this current inventory levels? That would be tough. But really, we see the inventory coming back. discounting coming back incentives coming back, it's just it, we'll get we'll get everything back in balance. Right. Right. Right. So again, you know, a lot to unpack last question for you. Top three takeaways from, you know, your presentation today. Gosh, you know, for the audience, I think really, you know, keeping in mind, the inventory, and well, you know, the headline, everybody understands inventories low, you can see some of the dynamics. So when you're looking at data, keep in mind, it's been influenced by the by the low amount of inventory, if someone tells you pickup trucks are down, keep in mind, it's probably more to do with inventory than it is anything else. You know, I would say, I think the lenders have done a good job keeping the lgbs in check right there, these prices will fall. And it's, again, it's a function of the inventory, you know, that the values are going to come back to more realistic levels. So you don't want to be chasing the market. I think the lenders have done a good job with their risk appetite. Even though volume may fall a little bit as inventory, whoa, gets lower. Don't Don't chase the market with risk levers. It'll come back. Take care of your portfolio, be happy, your credit losses are good. And we all know that's not going to last. We forecast anything dramatically happen, but we know the market will get to normalcy within hopefully another 12 months. Right, right. Um, Mike, always a pleasure. Thank you so much for being on the show. To our listeners, please. You know, let us know what market trends are you most interested in? Mike will be joining us again in January for his fourth appearance on the industry polls. And next month, we will have Jonathan smoke chief economist at Cox automotive on the program. So thank everyone again and Thank you, Mike, for joining us today. Thank you. I look forward to seeing in October in Las Vegas. Absolutely. Thanks. [/toggle]
