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Kontos: Worst Over in Used Vehicle Market?

January 15, 2009

 December (and early January) results appear to support our conclusion last month that "the worst may have been over [for the used vehicle market] in late-October/early November around the time of the election."  Auction industry average prices, sales volumes, conversion rates (units sold as a percentage of units offered), and inventory levels, all indicated more-favorable wholesale market conditions.  Fundamentally, retail sales of used vehicles improved -- perhaps as value-conscious consumers increasingly look to used vehicles in these tough economic times.  In turn, this is driving demand by dealers seeking to supplement low trade-in volumes with the attractive values and selection available in the auction lanes.

 

A significant development contributing to improved retail sales and auction activity was the approval on Christmas Eve of bank holding company status for GMAC, entitling that entity to funds from the TARP program.  Also of critical importance was the Federal Reserve Board's recent decision, aided by NADA lobbying, to explicitly include dealer floor plan financing in federal aid packages.  Coupled with approval of $17.4 billion of loans to General Motors and Chrysler, this access to capital appears to have brightened the holiday and post-holiday spirits of dealers as a bleak 2008 drew to a close and a more optimistic New Year began.  Put another way, these developments gave more dealers the confidence and ability to buy vehicles at auction to support what looks to be an improving retail market.

Details

According to ADESA Analytical Services' monthly analysis of Wholesale Used Vehicle Prices by Vehicle Model Class1, wholesale used vehicle prices in December averaged $9,022 -- a 3.6% increase over November.  December's year-over-year decline was 7.4%, compared to declines of 10.0% in November and 11.3% in October.  This marks the second straight month-over-month increase since October's near-record low and record year-over-year price declines.  Full-size SUVs showed the highest monthly price gains, while compact car prices declined the most, as wholesale prices continue to reset after over-corrections when gas hit $4.00 in May/June.  Luxury cars and SUVs showed increases similar to those of the market as a whole, as did full-size cars that are popular fleet vehicles.  Another popular fleet segment, minivans, showed strong price growth.

December prices for vehicles sold in manufacturer sales were down 9.0% year-over-year, fleet/lease sales prices were down 10.9% and dealer consignment sales prices were down 17.5%.  These year-over-year declines were all milder than those in November, and in the case of manufacturer sales, prices were up significantly (3.8%) versus prior-month.  This was important for manufacturers who chose to sell their vehicles in December rather than waiting until the New Year.

As a result of solid market conditions and realistic price expectations by sellers in December, auction industry sales volumes rose by 5.0% compared to November, conversion rates rose above their historical norm of around 60% and industry inventory levels dropped from an 73 days to 71 days, according to ADESA Analytical Services estimates.  Nevertheless, auction inventory levels remain high and will put continued downward pressure on wholesale prices, especially if sellers revert to overuse of no-sales and thereby add to the inventory pile.

On a sequential basis, retail sales were up for both franchised and independent dealers, yielding a 4.0% combined increase for the month.  Although data from CNW Marketing/Research, showed that December retail used vehicle unit sales were down 6.9% year-over-year for franchised dealers, 11.9% for independent dealers and 9.2% overall, these year-over-year declines were all milder than those in November.

Also of note, certified used vehicle sales were up 14.4% year-over-year in December, allowing the year to show a modest, but important increase of 1.0% versus 2007.

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