Wholesale Prices Slip in February
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Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) fell by 0.2 percent in February. However, given a sharp decline in pricing in February of last year, the Manheim Index now shows a year-over-year gain of 1.1 percent. The Manheim Used Vehicle Value Index stood at 124.6 for February.
Although wholesale prices rose in only one month out of the last seven, stability remains the watchword for used vehicle values given that all of the declines were small. In the face of heavy new vehicle inventory and incentives, the stability of used vehicle values is a credit to the retail market that continues to provide dealers the ability to quickly retail wholesale acquisitions at reasonable grosses.
Rental risk auction volumes up in early 2017. The auction volume of risk units actually sold was up in the first two months of 2017, even though conversion rates were a little weak. Given that new vehicle sales into rental were down during this period, it suggests that the rental companies were getting their fleets right-sized.
A straight average of auction pricing for rental risk units in February was up 5 percent from a year ago, but much of that reflects mix shifts and mileage changes as well as a temporary weakness in the market last year. Our index of rental risk pricing that adjusts for broad changes in mix and mileage was down both sequentially (1.2 percent) and year-over-year (3.8 percent). The average mileage on rental risk units sold at auction was 39,100 miles, which is very close to what it has averaged since the summer of last year.
Pricing trends by market class. Although it remains the case that pricing for trucks, CUVs, and vans remains up year-over-year while cars are down, the weakest of the car segments (compacts) has actually tracked the overall market the past three months. It is risky to say that compacts reached their bottom because there have been so many false bottoms over the past couple of years, but there are promising signs.
On a non-seasonally adjusted basis, sports cars were the only segment that was up, but the February lift was much less than normally occurs. As such, the seasonally adjusted price for sports cars in February was down more than any other major segment. This might have been one area where reduced tax refunds did have an impact.
A crazy tax refund season fails to stump dealers. Because of the law requiring tax refunds involving the Earned Income Tax Credit or the Additional Child Tax Credit to be held until February 15, year-to-date tax refunds through February 10 were down 69 percent, or $65 billion, from a year ago. But then the floodgates opened, and a record $74 billion in tax refunds was distributed during the single week ending February 17. As of February 24, year-to-date tax refunds were down ten percent, or $15 billion. The unusual flow of tax refund monies this year appears to have had less of an effect on dealers than one might expect, especially since other retailers (most notably, TV and appliance stores) did notice a significant impact.
Used vehicle retail sales continue to grow. Franchised and independent dealers started 2017 on a strong note, with January gains in retail used unit deliveries of four percent and eight percent, respectively, according to NADA. Channel checks suggest that February increases were also achieved, although probably more modest ones.
CPO sales in February were basically flat after posting only a 0.8 percent gain in January. The fact that CPO car sales were down five percent in February while CPO truck sales were up five percent supports our theory that CPO sales growth is possibly being restrained by small potential gross profit lifts in certain segments. That theory is further supported by the ten percent decline in domestic brand CPO sales, a one percent increase for mid-line imports, and a fifteen percent increase for luxury units.
Inventory + Incentives = Sales. New cars and light-duty trucks sold at a seasonally adjusted annual rate (SAAR) of 17.5 million in February – in other words, right in line with the full-year pace of 2015 and 2016. Given that dealers started the month with more than four million units sitting on their lots, it was certain that metal would be moved. Incentives helped in the process. Naturally, however, this created some downward pressure on residuals.
In fact, studies generally show that inventory level has a stronger statistical relationship to residuals than does incentive spend. The two are, of course, first cousins; but inventory level has the benefit of being a more precise measurement as well as the one that can capture the impact of a shifting dealer mindset and the willingness to forgo gross to make a sale.
Although the industry made progress in getting inventory levels back in line during February, there is more work to be done. As such, the pressure on used vehicle values will remain.
Although wholesale prices rose in only one month out of the last seven, stability remains the watchword for used vehicle values given that all of the declines were small. In the face of heavy new vehicle inventory and incentives, the stability of used vehicle values is a credit to the retail market that continues to provide dealers the ability to quickly retail wholesale acquisitions at reasonable grosses.
Rental risk auction volumes up in early 2017. The auction volume of risk units actually sold was up in the first two months of 2017, even though conversion rates were a little weak. Given that new vehicle sales into rental were down during this period, it suggests that the rental companies were getting their fleets right-sized.
A straight average of auction pricing for rental risk units in February was up 5 percent from a year ago, but much of that reflects mix shifts and mileage changes as well as a temporary weakness in the market last year. Our index of rental risk pricing that adjusts for broad changes in mix and mileage was down both sequentially (1.2 percent) and year-over-year (3.8 percent). The average mileage on rental risk units sold at auction was 39,100 miles, which is very close to what it has averaged since the summer of last year.
Pricing trends by market class. Although it remains the case that pricing for trucks, CUVs, and vans remains up year-over-year while cars are down, the weakest of the car segments (compacts) has actually tracked the overall market the past three months. It is risky to say that compacts reached their bottom because there have been so many false bottoms over the past couple of years, but there are promising signs.
On a non-seasonally adjusted basis, sports cars were the only segment that was up, but the February lift was much less than normally occurs. As such, the seasonally adjusted price for sports cars in February was down more than any other major segment. This might have been one area where reduced tax refunds did have an impact.
A crazy tax refund season fails to stump dealers. Because of the law requiring tax refunds involving the Earned Income Tax Credit or the Additional Child Tax Credit to be held until February 15, year-to-date tax refunds through February 10 were down 69 percent, or $65 billion, from a year ago. But then the floodgates opened, and a record $74 billion in tax refunds was distributed during the single week ending February 17. As of February 24, year-to-date tax refunds were down ten percent, or $15 billion. The unusual flow of tax refund monies this year appears to have had less of an effect on dealers than one might expect, especially since other retailers (most notably, TV and appliance stores) did notice a significant impact.
Used vehicle retail sales continue to grow. Franchised and independent dealers started 2017 on a strong note, with January gains in retail used unit deliveries of four percent and eight percent, respectively, according to NADA. Channel checks suggest that February increases were also achieved, although probably more modest ones.
CPO sales in February were basically flat after posting only a 0.8 percent gain in January. The fact that CPO car sales were down five percent in February while CPO truck sales were up five percent supports our theory that CPO sales growth is possibly being restrained by small potential gross profit lifts in certain segments. That theory is further supported by the ten percent decline in domestic brand CPO sales, a one percent increase for mid-line imports, and a fifteen percent increase for luxury units.
Inventory + Incentives = Sales. New cars and light-duty trucks sold at a seasonally adjusted annual rate (SAAR) of 17.5 million in February – in other words, right in line with the full-year pace of 2015 and 2016. Given that dealers started the month with more than four million units sitting on their lots, it was certain that metal would be moved. Incentives helped in the process. Naturally, however, this created some downward pressure on residuals.
In fact, studies generally show that inventory level has a stronger statistical relationship to residuals than does incentive spend. The two are, of course, first cousins; but inventory level has the benefit of being a more precise measurement as well as the one that can capture the impact of a shifting dealer mindset and the willingness to forgo gross to make a sale.
Although the industry made progress in getting inventory levels back in line during February, there is more work to be done. As such, the pressure on used vehicle values will remain.
Tom Webb is chief economist for Cox Automotive. Contact him at Tom.Webb@coxautoinc.com or follow him on Twitter at @TomWebb_Manheim.
