All kinds of crazy spikes in used-vehicle wholesale and retail markets topped out, but by only a tad.
By Wolf Richter for WOLF STREET.
Dissecting and reporting the nutty spike in used vehicle prices for the past 10 months has been quite a ride for me, having spent a decade working in the car business. I’d never before seen anything even remotely like it, with year-over-year price spikes of over 30%, leading to the crazy situation where some sought-after one-year-old used models sold for more than the new model, as people couldn’t buy the new model because it had sold out due to the semiconductor shortage.
But we may have finally seen peak nuttiness. Dealers and customers may be finally taking a deep breath. A month ago, I reiterated my gut feelings “that these crazy price spikes cannot continue for long, and some of this will eventually unwind, and thereby they sort-of fit the Fed’s definition of ‘temporary,’ but they won’t go back to where they had been.”
In its weekly auction index, J.D. Power noted that the price increases of used vehicles that sold at auction were softening in late May. Then, for the week ended June 20, it noted the first week-over-week price decline, after 24 weeks in a row of often hefty price increases.
About 80,000 vehicles were sold at auction that week, according to J.D. Power. That was down nearly 30% from the same week a year earlier and well below the average in April and May.
In its mid-June update, Manheim, the largest auto auction operator in the US and a unit of Cox Automotive, had reported that prices were up only a tad compared to May and had begun to weaken.
Today, Manheim reported that for all of June, its Used Vehicle Value Index actually ticked down 1.3% from May, the first month-to-month dip all year, but was still up 34% from June last year. This early evidence suggests that the spike in nuttiness may have gone as far as it’s going to go:
Pickup trucks were still the hottest price-spikers, but the year-over-year price spike of 49.5% in June, as mind-boggling as this still seems, was down from the 70% year-over-year spike in May, and the 78% year-over-year spike in April. These are just head-scratcher figures:
Sales volume also fell on the retail side. In June used vehicle retail sales fell to a seasonally adjusted annual rate (SAAR) of 21.3 million vehicles, down 7.8% year-over-year, and down 2.7% from May.
Supply, both retail and wholesale, continued to climb back toward normal levels. Retail supply at the end of June rose to 41 days, up from 38 days in May (44 days = normal); wholesale supply rose to 20 days in June, up from 19 days in May (23 days = normal).
This chart from the Cox Automotive quarterly conference call and presentation today shows used vehicle supply by week of each year. The big burst in 2020 from week 12 through 18 occurred during the lockdown in 2020 when sales volume collapsed. The yellow line, retail supply in 2021, shows how supply has been growing in recent months to end up in June just a tad below 2019 (gray line):
Used vehicle resale values over the past 10 months were another head-scratcher. They blew everything away. They surged across the board for all ages, with prices of newer vehicles surging the most. According to Cox Automotive, based on Manheim data, the average resale value of one-year-old (1 YO) vehicles surged by $6,718 year-to-date through week 26. Even the average resale value of 10 YO vehicles still jumped by $1,349:
In its presentation today, Cox Automotive also shed more light from a different angle on the curious phenomenon of low-mileage sought-after used vehicles suddenly retailing for more than their equivalent new models – as the new models were sold out due to the semiconductor shortage.
The chart below shows two indexes: the average transaction price (ATP) for new vehicles set at 100 for January 2012; and the unadjusted Manheim Used Vehicle Value Index, also set at 100 for January 2012. The ATP index had been rising slightly faster than the Used Vehicle Value Index until mid-2020, when the used vehicle prices began to spike.
And there’s another mind-blower: a spike in the average mileage on vehicles that rental car companies sold at auction.
Prior to 2020, rental fleets bought over 2 million new vehicles per year. But in 2020, as demand for airport rentals collapsed, rental companies defleeted by selling vehicles and by slashing orders for new vehicles. In 2021, when travel took off, and rental fleets needed cars, automakers got hit by the semiconductor shortage and prioritized high-profit retail sales over low-margin fleet sales. And rental fleets, short on vehicles, kept what they had much longer.
Rental fleets dispose some of their vehicles by selling them back to automakers under programs where the automaker is at risk for the resale value; and they dispose of the remaining vehicles by selling them at auctions or on their own retail lots. With these units, fleets carry the risk of resale value.
The mileage on these “at risk” rental units had been increasing for years. Then came the rental vehicle shortage of 2021, and the average mileage spiked. By May 2021, the average miles on at-risk units sold at auction had doubled year-over-year. But here too, the spike seems to have peaked: In June, it ticked down a smidgen to a still astronomical 86,888 miles
Vehicles are a discretionary purchase for most people. Most people can continue to drive what they now have for another year or two. They’re buying today because they want to buy. If they don’t want to buy, they can easily wait. And they did that massively during the Great Recession when vehicle sales collapsed and stayed low for years.
The kind of nuttiness that has transpired since last summer normally gets resolved long before it gets this far. Normally people go on a buyers’ strike, which ends the price spike before it gets started. It didn’t happen this time. Instead, dealers and retail customers jostled for position to pay ridiculous prices. But this may have finally gone as far as it’s going to go.
Going forward, lower prices are likely – but lower only from the crazy peak of the spike. It’s highly doubtful prices revert to anywhere near February 2020 levels. They will likely fall some, find a base that is still much higher than February 2020, and then move higher from there.
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