I’d say, prices at wholesale are still idiotic, but slightly less idiotic. Retail prices lag a month or two.
By Wolf Richter for WOLF STREET.
A month ago, when I reported that used vehicle wholesale prices had ticked down just a tiny 1.3% for the first time after the craziest price spike ever, where prices had jumped 48% from a year earlier, I mused, Was This Finally “Peak Insanity” in Used Vehicle Prices? No one knows what might happen next in this crazy overstimulated economy, but we now have the second down-tick in a row.
Today, Manheim, the largest auto auction operator in the US and a unit of Cox Automotive, reported that its Used Vehicle Value Index for July declined by 2.6% from June, the second month-to-month dip after spiking all year, but it was still up 24% from July last year, when the spike was already in full swing, and by 39% from two years ago.
What remains a mystery is why people buy used vehicles at those utterly idiotic prices because for most people a vehicle purchase is discretionary: They can easily drive what they already have for a year or two or three and let this madness blow over. During the Great Recession, people have proven they can do this. But no. Instead, overstimulated buyers were eager accomplices in this madness:
Manheim also said that over the last five weeks, the sub-index for three-year-old vehicles declined by 3.6%.
Retail prices lag whole sales prices by a month or two. So any price declines at the wholesale level now will not make to dealer lots until this fall.
Wholesale prices in July dropped from the insane levels in June across all product categories. The nuttiest price spikers, pickup trucks, which in March and April had booked year-over-year price spikes of over 70% – who exactly bought trucks at these idiotic prices? – dropped the most in July, from June.
These month-to-month declines for the second month in a row chopped down the year-over-year price spikes. And this is starting to form a real trend. The chart below shows the sharply diminishing, but still huge year-over-year price spikes by vehicle segment in April (yellow), May (green), June (purple), and July (red). The prices in July were still idiotic, being between 16% and 26% above the already spiking prices in July last year, but they’re a tad less idiotic than they were a few months ago:
Wholesale volume in July dropped 19% year-over-year to a seasonally adjusted annual rate of 17.0 million vehicles, according to Cox Automotive estimates.
And there was plenty of supply. Wholesale supply in July was 21 days, just below normal levels of 23 days.
Retail sales of used vehicles in July inched up less than 1% from June, but was down 9% year-over-year, at a seasonally adjusted annual rate of 21.5 million vehicles.
Retail supply of used vehicles on dealer lots declined 4.8% by the end of July, to 39 days, when 44 days is considered normal.
Vehicles coming out of the rental fleets are normally a major source of supply to the wholesale market. These vehicles are between one and three years old. But the whole machinery got monkey-wrenched last year when the travel business collapsed, along with two rental car companies – Hertz and Advantage. Rental fleets stopped ordering new vehicles and trimmed what they had.
Then, as the travel business rebounded, rental fleets were in short supply of vehicles and couldn’t get new vehicles from automakers because of the chip shortage, and some fleets started buying vehicles at auction locally, instead of selling vehicles at auction. This contributed to the massive shortage and disruption and price spikes earlier this year.
And it is having a side effect: rental fleet are keeping their “at risk” vehicles much longer and are putting far more miles on them before they sell them at auction.
Rental fleets operate vehicles under two types of scenarios: one, under a program with automakers where they sell their units back to the automaker, and the automaker is at risk for the resale value; and two, where the rental fleets sell the vehicles at auctions or on their own retail lots and take the risk of the resale value. It is these “at risk” vehicles that fleets are keeping longer, and they’re running up the miles.
In July, the average mileage of those “at risk” vehicles sold at auction rose to 88,000 miles, the third month in a row in that range, up by 89% from a year ago. This chart from Cox Automotive’s Q2 presentation shows at risk mileage through June. These high-mileage rental units pose an additional challenge: Not only are retail buyers going to pay out of their nose for them, but they’re also getting a vehicle with 80,000 miles of rental driving on them. This is something that in normal would make you go hmmm.
People trying to buy new vehicles found themselves frustrated by lack of choice and by the puffed-up prices, and many of them walked. Read… New Vehicle Sales Slammed by Semiconductor Shortage, Record Low Inventories, Beginnings of Buyers’ Strike
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