Wholesale Prices Fall in February
In February, wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) declined at their fastest pace in more than three years. It brought the February reading to 123.3, a decline of 1.4% from a year ago.
February’s relatively steep decline in wholesale pricing – remember seasonally adjusted (prices were up before the adjustment) – resulted in the Manheim Index’s falling back to its long-term trendline. Given that the Index has been above-trend for 66 of the past 72 months, look for an extended reversal to cause lenders and lessors to reassess collateral risk and contract residuals. We expect the adjustments will be modest, however, and, thus, the availability of retail financing will remain supportive to the used vehicle market in the near term.
Tax refunds accelerate mid-month, but still lag year-to-date. Due primarily to an IRS computer outage, tax refunds after the first week of February were down 11%, or $7.5 billion. With that issue resolved, refunds began to re-flow strongly by mid-month, and, at the end of the third week of February, individual refunds were down only 3.3%, or $4.1 billion. To date, 81% of the returns have resulted in a refund, and the average amount was $3,128. Both of these stats are similar to last year.
New vehicle sales: Again steady, but unspectacular. New cars and light-duty trucks sold at a seasonally adjusted annual rate (SAAR) of 17.4 million in February, which was similar to January and the full-year 2015 record pace. On a three-month moving average basis, the SAAR has been plateauing, however, and both incentive spending and fleet deliveries in the first two months of 2016 increased at a double-digit pace compared to a year ago.
Used vehicles: Higher sales on narrower margins. In the fourth quarter of 2015, the seven publicly traded dealership groups posted their 26th consecutive quarterly increase in used retail unit sales on a same-store basis. The average gross margin on those sales, however, fell to a record low. As noted last month, we believe that, as dealers try to arrest their margin compression, it will apply additional downward pressure on wholesale pricing.
In January, total used vehicle sales rose 8%, with dealer transactions up more than 10%, according to NADA. Preliminary numbers suggest a more modest rise in February. CPO sales, after declining 2% in January, rose 7% in February, resulting in a year-to-date gain of 2.5%.
Rental risk pricing declines. A straight average of auction pricing for rental risk units fell to its lowest February level in three years. Prices were off 4.1% from a year ago, despite an 11.5% decline in average mileage at time of sale. Our rental index that adjusts for broad changes in mix and mileage was down 5.5% from a year ago.
New vehicle sales into rental were up nearly 13% in the first two months of 2016. Given indications that rental car companies are over-fleeted, we expect this pace of deliveries to slow in the coming months and for the number of units entering the wholesale market to rise.
Market class and consignor segment trends. Luxury cars have outperformed the overall market in recent months; but on a year-over-year basis, they remain the second-weakest segment. Values for compact cars continued to fall, both in recent months and over the past year.
The total van market has a year-over-year decline in wholesale pricing, but it is all accounted for by minivans. Fullsize passenger and cargo vans have a 2% increase in pricing over the past year.
Unadjusted prices for dealer and commercial consignments fell from January to February, but were 2% to 3% higher than a year ago. Average mileage was 3% lower than last February.