Used value for all vehicles, such as this 2018 Lincoln Navigator SUV, will not be impaired amid the latest price increases in the supply chain.
Photo: Bobit
Our team hosted the Manheim Quarterly Used Car Value Index call last week. We looked at the performance of the used car market through the last quarter of 2021 and provided our future view of the market in 2022.
A major topic of discussion, of course, was the elephant in the room: Will the recent rise in used car prices cause the market to boom in 2022?
Without a doubt, last year was a remarkable year for the market. As my colleague Kevin Chartier, vice president of Manheim Consulting, noted on the call, “2021 is the perfect storm: massive fiscal stimulus into a reopening market, as well as the availability of new vehicles.” Under those conditions, it’s not surprising that used car values ended the year well at record levels, prompting some industry analysts to call for a drop in pending used car prices.
The car market fundamentals look good
But here’s the bottom line: Market fundamentals don’t favor such a scenario.
The core argument behind the crash scenario seems to be based on the premise that the retail price of a used car and the retail price of a new car are severely disparate. But in reality, the relationship – the gap between new and used – is not too far off from the range experienced over the past decade.
In 2019, the average price of a new car was 179% of the average price of a used car. In 2021, the average is 163%. The gap in 2021 is closed as used retail prices increase by 25% while the average transaction price of new vehicles (ATP), according to our Kelley Blue Book team, is up around 14% in 2021.
The gap between new and used car prices is not fixed, as it changes dramatically over time. In 2014, it averaged 167%. This follows a very strong spring for used car values. As a result, the market does not have large or rapid market price corrections. It had just 24 months of above-average price declines in the second half of 2014 and 2015 and much of 2016, when the new car market was at its peak and supply and demand began to wane.
In our opinion, the price of a used car is basically the same as the price of a new car. Going forward, we expect used car prices to drop in 2022. However, new car prices are likely to continue above-average inflation, as inventories improve but remain tight in history and a mix of newly produced vehicles favors expensive SUVs, trucks, and new electric vehicles. That means, at the end of the year, the relationship between new and used prices could be back in historical standards and there would be no basis for judging the values as inconsistent.
No breakdown in previous financial crisis
A significant drop in used car prices – between 20% and 30%, as a well-publicized report shows – is highly unlikely. History tells us that a drop of more than 10% is indeed rare. Why? When prices fall, demand increases. In 25 years, never before have we seen a drop of as much as 13% within a year. Some points to consider:
- After the 9/11 terrorist attacks in New York City in September 2001, the value of used cars fell 5.7% within two months as the economy struggled to regain strength. Full recovery value within 6 months.
- In the fall 2002 rental agreement, the value of the used car fell by 11.3% over an eight-month period and took 35 months to fully recover. However, this is a relatively special problem for the market, with too much new and used supply.
- In 2008, when the global financial system was on the verge of collapse, used car values fell 12.6% in three months. Value takes 7 months to recover.
- In 2020, at the start of the pandemic, when the economy came to a standstill, the value dropped 10.1% in 1 month and fully recovered 3 months later and entered record territory.
The fundamentals are simply not available to dictate even double-digit corrections next year. Used wholesale prices have never seen a correction greater than 5% without a severe oversupply situation. And we don’t see that happening. The opposite: With sales declines for fleets and rental cars since 2019, wholesale vehicle stock is limited at least through 2023. And demand remains pent-up due to last year’s lack of supply. . Furthermore, the supply of new vehicles is likely to remain constrained until at least 2022.
Negative vehicle equity is overstated
During our call last week, questions were raised about the potential negatives consumers can face, having paid “too much” for a used car in recent months. Again, we consider those concerns overstated.
Vehicles have been bought and sold at market prices, and comparisons with pre-pandemic values are misleading. We had a step change in value and values have never gone back to where they were before, even during a recession. As long as there is inflation in new car prices and in the economy, the value will go up. Therefore, it is highly unlikely that we will see 2019 values again. Auto credit does not face a growing negative equity problem.
Vehicles are a depreciating asset. Auto loans are guaranteed with that in mind and are designed to have negative equity over their maturities. With higher upfront payments combined with the price increase already in place in 2021, the current car loan-to-value ratio is lower, not higher. If we only see above-average depreciation in 2022, the risk will not increase for lenders and investors. Buyers will not face negative equity challenges that differ from what we experienced before the pandemic.
It is true that used car margins will decline, but they are likely to remain above pre-pandemic levels until at least the first half of 2022. Dealers need to be careful when purchasing. and used-vehicle inventory management as used-vehicle value approaches and a more normal depreciation model. Barring an economic disaster, however, we won’t see used car values return to pre-pandemic levels. We forecast the wholesale used car value to be down around 3% y/y by the end of 2022. No one, dealer or consumer, need to worry about a drop in car value. used.
Originally posted on Vehicle Remarketing
