Today’s high resale values are an anomaly caused by the shortage of used vehicles in the wholesale market due to the extremely low sales of new vehicles during the 2008-2011 timeframe. Nowadays, everyone is a hero when it comes to getting top dollar for their out-of-service fleet vehicles. However, these artificially high prices will ultimately decline as used-vehicle supply increases. Most remarketing analysts predict used-vehicle supply will begin to increase starting in CY-2013. As used-vehicle supply reaches equilibrium with buyer demand, resale values will soften.
“My estimation is that today’s market is about 10-percent inflated. So between now and equilibrium, that’s the drop I anticipate,” said Gus Xamplas, vice president of remarketing for Donlen Corp. “Upon returning to normalcy, I think we’ll see the rougher, less fuel-efficient vehicles decline first and decline the most, probably by more than 10 percent. Cleaner, lower-mileage, higher-mpg units will continue to command the highest prices in their segments, so less than a 10-percent adjustment.”
Tim Lawson, director of remarketing for Mike Albert Fleet Solutions, likewise predicts that “we’re going to see about a 10- to 15-percent decline back to normalcy, losing a few percentage points per year through 2014.”
Equilibrium between Supply and Demand
Most out-of-service fleet vehicles are remarketed at auctions. After a dramatic drop-off in consignments over the past several years, expectations are that auction inventory, in general, will increase during the 2013 to 2015 timeframe.
“This will be driven by post-recession, improving new-vehicle sales. This trend means the favorable supply environment consignors are currently enjoying should continue through 2012 and then begin to ‘normalize,’ as the auction volumes increase to levels that adequately support use-vehicle demand,” said Paul Fortin, VP, asset risk management and analytics for LeasePlan USA.
In the final analysis, it is the shortage of used vehicles that is the primary factor fueling today’s strong resale values. “Demand may not be really strong, but supply is really low,” said Xamplas. “We may not yet have hit the bottom of used-vehicle supply. I believe there will continue to be fewer used vehicles in the market through 2012. Starting in 2013, I expect a gradual ramp up in the volume of used-vehicles. I’m not expecting any drastic month-to-month changes, but there will be a gradual softening of used-vehicle prices, over time, as supply increases.”
Lawson believes the strong used-vehicle market will last another two years. “But we feel we are at the peak now and prices will continue a slow softening with typical seasonal swings.” Lawson foresees equilibrium returning to the market in 2014. “Retail leases are on the uptick now, but those going out today will not hit until later in 2014, most likely. We’re anticipating that commercial leases will gain better traction next year, thus we’ll see those return to the market in 2014, as well,” said Lawson.
Residual forecasting publications, such as Black Book, are already making residual adjustments for future model-years.
“The real key is in the residual projections from the spring of 2011. They cannot be based on current used values and expecting that strength to continue. If the current projections are adjusted as Black Book is doing, there still could be solid returns in relation to EOT (end-of-term) value. We don’t want management to continue to believe the levels of equity at EOT will match those we are having today,” said Ricky Beggs, VP and managing editor of Black Book.
Although most foresee equilibrium between supply and demand in the wholesale market emerging in the 2013-2014 timeframe, the uncertainty, due to uncontrollable market variables, is whether the decline in resale values will have a “soft landing” or a “hard landing.” The greatest risk for a “hard landing” (a sharp decline in used-vehicle values) would be a dramatic improvement in the national economy. “If there was a complete turnaround in the economy, unemployment, and consumer confidence, all at once, then there would be a hard landing. But we don’t foresee this happening,” said Beggs. “The trending to softer used-vehicle value-retention will be gradual. It will coincide with the increase in new-vehicle sales volume. But we will still be short of the peak new-vehicle sales number by 3 to 4 million units, so the supply will remain tight enough to hold the line in depreciating values.”
There is a seasonality and cyclicality to the used-vehicle market; however, these market dynamics are susceptible to a number of outside variables, most of which are outside our control.
"The used-vehicle secondary market historically is somewhat cyclical in nature, with most market measures showing that the market is relatively high compared to historical averages. Since these cycles are driven by a complex mix of industry and macroeconomic variables, including some segment-specific variables, such as fuel prices, which impacts all used-vehicle segments differently, predicting future market levels in absolute terms is not a prudent practice,” said Fortin. “What we can assume is that if the historical behavior of the market is not derailed, we can expect the market could easily return to cyclical averages in the midterm that are 10 percent-plus below current levels (depending on which industry index is followed). If key variables such as credit availability deteriorate further than anticipated, the market could dip well below historical averages in the midterm. On the flipside, if employment and output begin to improve and positively impact the demand for used vehicles, the low auction volumes may support the market at levels above the historical averages for a longer period than expected.”
Although opinions vary as to when equilibrium will occur, everyone agrees residuals will soften. Are you preparing your management for this impending adjustment in resale values?
Let me know what you think.