Wholesale Prices Fall in January
Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) fell in January. It was only the second decline in the past eight months, and it brought the January reading to 125.2 – virtually unchanged from a year ago.
Although it has been long anticipated that wholesale values would ease in 2016 as a result of higher supply, we suspect the first downward movement of the year was more the result of past margin compression than growing wholesale volumes. Retail used vehicle gross margins were not strong in the fourth quarter of last year, so it is only logical that dealers will moderate their bidding until such time as the risk-reward ratio comes back into better alignment
Are financial markets pointing to credit contraction? To be sure, violent swings in equity and debt markets are notorious for giving false signals of imminent doom. But the root causes of those market movements cannot be ignored. And, in this case, there’s a devil’s brew of them: global economic slowdown, aggressive Bank of Japan and European Central Bank actions, collapsing oil and other commodity prices, currency manipulation, capital controls, and large amounts of dollar-denominated debt held by countries and companies that can ill afford it. .
What does any of this have to do with the availability of used vehicle loans? Quite a bit, possibly. Financial market turbulence can impact access to funds even for lenders with impeccable underwriting standards and loan portfolios that are performing extremely well. If auto loan delinquencies and loss severities rise in the first quarter, it will be viewed with concerned, even if both of those ratios remain low from a historical perspective.
New and used vehicle sales: steady, but unspectacular. Rounding up to 17.6 million, the seasonally adjusted annual selling rate for new cars and light-duty trucks in January once again “beat” expectations. But this one came with more than a single note of caution. January’s sales pace is always sensitive to the seasonal adjustment factor – one which this year was further complicated by the adjustment for two fewer selling days. (Many think that even a one-day adjustment is a rather quaint notion that ignores reality and common business practices.) On a three-month moving average basis, the SAAR was 17.6 million in January, versus a high of 18.1 million in November.
In any event, one thing is clear: Adjusted or unadjusted, retail sales were down and incentive spending was up in January relative to a year ago. Total fleet purchases rose 14% in January, with sales into rental up more than 13%, commercial deliveries up 9%, and government purchases up more than 30%.
Preliminary numbers suggest that total used vehicle sales were able to eke out a small gain in January (without the aid of a selling day adjustment). CPO sales in January declined 2.1%. Granted, there is no selling-day adjustment, but even if there were, the resulting increase would be small compared to the large percent gains posted in each of the last three years.
Rental risk pricing remains steady. In January, auction prices for rental risk units (adjusted for broad changes in mix and mileage) declined 0.6% from December and were down 3.3% from a year ago. Overall, however, this price series has remained in a very narrow range for more than five years.
Unadjusted prices set a new January high, based in part on a 7.6% decline in average mileage from a year ago. Auction volumes for rental risk units were down in January relative to last year.
Market class and consignor segment trends. Wholesale pricing for minivans has eased noticeably in recent months, but firm valuations for full-size cargo units kept the total van category up year-over-year in January. Pickups, both midsize and full-size, remain the strongest segment in recent months and over the past year. Within the SUV/CUV category, full-size units have far outperformed the other subcategories.
In January, compact cars remained the weakest of the major categories, with a year-over-year decline of near 9%. Luxury cars – and all of the subcategories in that segment – have also underperformed the market over the past year.
A straight average of all auction sales showed pricing up nearly 2% over the past year, and up almost 8% over the past three years. This overperformance relative to the Manheim Index reflects the movement upscale in the market class of vehicles being sold, and the shift toward more late-model, lower-mileage vehicles being offered in the wholesale market.