Wholesale Prices Rise For Fifth Consecutive Month
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Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased for the fifth consecutive month in October. This brought the Manheim Used Vehicle Value Index to a reading of 125.3, exactly where it started the year and up 2.9 percent from last October.
Continued strength in wholesale pricing is reflective of higher new vehicle transaction prices and a rewarding retail used vehicle environment. Higher wholesale prices, narrower gross margins, and record dealership profits are evidence that the benefits of increased dealership efficiency are being passed on to consumers and enabling dealers to bid up prices in the wholesale market. Greater confidence in their ability to turn a vehicle at a given price within a set period of time allows dealers to reduce the risk discount incorporated into any wholesale bid.
Rental risk pricing remains strong. Auction prices for rental risk units (adjusted for mileage and mix) showed a normal seasonal decline in October, but were up 0.7 percent from a year ago. There was a smaller monthly decline in the straight average of rental risk pricing than in mix-adjusted series since pickups, crossovers, and vans accounted for a greater share of off-rental volume in October than in September.
Auction volumes for rental risk units last month were down significantly from last October, since last year’s normal August and September de-fleeting was pushed into October due to several recalls that impacted many units in the rental fleet.
Market class, price tier, and consignor segment trends. Compact cars remain the weakest segment, both in recent months and over the past year. Although wholesale pricing for luxury cars has been soft during the past year, October was relatively good. Don’t expect that trend to continue given the influx of off-lease luxury units that will come in November and December.
Relative pricing strength by price tier, which we estimate based on average mileage per tier, was fairly consistent for all price points in October. And, unlike most months, there was no relationship between pricing and auction volumes for the various price tiers.
A straight average of auction pricing in October versus a year ago was up considerably more than the Manheim Index since this year’s sales included more lower-mileage, and higher-end, units. Dealer-consigned vehicles, in particular, posted strong pricing in October. Average mileage on those units was lower than it has been in the past two years as dealers received newer trade-ins.
New vehicle sales keep on trucking. New vehicle sales once again exceeded expectations as the seasonally adjusted annualized rate (SAAR) was above 18 million for the second consecutive month. The year-to-date SAAR is 17.3 million, which means many analysts will need to slightly bump up their full-year forecasts given that there is reason to expect a meaningful deceleration in the sales pace. In fact, November and December have become increasingly competitive new vehicle sales months in recent years, especially in the luxury segment. Expect no deviation from that this year.
The net impact of the new vehicle environment will likely remain benign relative to used vehicle residuals for the remainder of the year; but next year’s spring market may see a smaller bounce in wholesale pricing if a leveling, or declining, SAAR spurs additional incentive activity.
Used vehicle sales continue to rise. Used vehicle retail sales, as tallied by NADA, continue to grow at a faster pace than they did at the beginning of the year, and total sales will likely approach 40 million for the full year. Part of this is "forced churn" created by soaring new vehicle sales, but it is not churn conducted at a loss. Indeed, net profit margins are strong. Preliminary numbers indicated that CPO sales in October continued at a record pace.
In the third quarter of 2015, the seven publicly traded dealership groups posted their 25th consecutive quarterly increase in same store retail used unit sales. The sales-weighted gain was close to five percent. (For this analysis, CarMax’s fiscal quarter was shifted forward one month to correspond with the other groups that report on a calendar year.) Although the average gross margin on these sales fell to a new low during the quarter, operating efficiency, and greater throughput per store produced record used vehicle department profits.
Tom Webb is Chief Economist for Cox Automotive. Contact him at Thomas.webb@manheim.com, follow him via Twitter at www.twitter.com/TomWebb_Manheim and read his blog at www.manheimconsulting.typepad.com.
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