Wholesale Prices Rise in April
Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) inched up in April after starting the year with three consecutive monthly declines. That brought the Manheim Used Vehicle Value Index to a reading of 122.8 for April. Given that wholesale prices were easing at this time last year, the year-over-year decline in the Index was reduced to 1.1% in April.
Fundamentals suggest that the Index’s rise in April will be temporary, but they do not suggest a near-term collapse in pricing. A modest easing in wholesale pricing would not be unwelcomed by dealers, and it would not be overly painful for commercial consignors. A bigger, say 5%, decline would be harmful to both.
New vehicle sales: Stable and sane. Last month, we asked the question: “Will the industry accept or defy the plateau?” April was an encouraging sign of acceptance. Sure, the seasonally adjusted annual selling rate (SAAR) jumped back up to 17.3 million (from 16.5 million in March); but that had a lot to do with five weekends and less to do with incentives. Dealer inventories are a bit high, but transaction prices have continued to rise. On net, we feel the new vehicle market remains benign with respect to its impact on wholesale used vehicle pricing. Given that the SAAR has averaged just under 17.2 million in the first four months of 2016, we would consider any pushing of the sales pace significantly above last year’s record 17.5 million as defiance against the market-based plateau – and one that would hurt used vehicle residuals.
Used vehicles: Volumes strong, margins weak. According to NADA, total used retail unit volumes rose 6.5% in the first quarter of 2016. Preliminary numbers and channel checks suggest sales rose again in April. Likewise, CPO sales jumped 8% in April, resulting in a year-to-date increase of 5.9%.
In the first quarter of 2016, the seven publicly traded dealership groups posted their 27th consecutive quarterly increase in same-store used retail unit volumes. The increase was modest (less than 1 percent), but naturally the comps are become increasingly hard. Unfortunately, the year-over-year change in gross margins on those sales has declined for the same extended period. Higher throughput and increased operating efficiencies have enabled dealers to make record profits despite the narrow margins, and thus, we expect they will continue to be active bidders on the growing volumes of vehicles being offered for sale at auction.
A flat tax season. Through April 22, total individual tax refunds were up a minuscule 0.4% from a year ago. The number of refunds was unchanged.
Rental risk prices ease further. The average auction price for rental risk units (adjusted for market class shifts and mileage) was down 7.5% from a year ago. Average mileage at 41,137 miles was the lowest since September 2014.
Auction sales: Younger, fewer miles, and higher-priced. A straight average of auction sales in April showed prices rising approximately 3% from a year ago, but that was the result of a higher commercial consignment share and newer units within that mix. The average mileage on all auction sales in April was the lowest since January 2011. The influx of newer units into the wholesale market has had significant downward pressure on the pricing of slightly older, higher-mileage units.