Cox Automotive chief economist Jonathan Smoke emphasized that the statement he was about to make was “not a negative thing.”
Smoke and other Cox Automotive leaders were speaking to reporters and others gathered at the company’s Detroit-area offices on Wednesday, discussing Cox's 2019 Mid-Year Review and Outlook report.
“The strongest part of the market — from a retail sales perspective, it’s driving the finance growth, certainly driving the profitability of dealers, and very important to the franchise business, driving the CPO, and producing the strong vehicle values that are helping residuals and helping leasing be more attractive — is the strong used-vehicle market,” Smoke said.
In particular, it’s an abundant supply of later-model vehicles that are becoming increasingly more affordable and attractive to buyers.
‘That’s where the affordable price points are’
Cox Automotive data shows that in 2019, monthly payments on new-car loans are $145 higher than those on used-car loans and $67 higher than new-car lease payments.
However, “where the real competition goes on” is between used-car loans and new-car leases, said senior economist Charlie Chesbrough.
The difference is $78 in 2019, but that gap has widened steadily since 2014, when it was leasing a new car had a premium of less than $40 over buying used.
“That’s a bridge too far for many consumers,” Chesbrough said, “and it’s going to push them into the used market, because it’s just too expensive on the leasing side.”
And compounding this pricing leverage the used-car market has is the fact that there are more “competitive” options in pre-owned thanks to off-lease volumes hitting the market, he said.
There are roughly 11 million “gently used” vehicles likely to be sold this year, according to Cox Automotive, which classifies this group as cars up to 4 years old.
This group, which consists of segments like off-lease vehicles and trade-ins, presents a “tremendous amount of competition,” Chesbrough said.
“If I’m in the market to get a vehicle, I can get this new vehicle for $40,000, or I can get this ‘gently used’ vehicle for 30, 40, 50% discount – it may not have all the bells and whistles, but it still has some – that’s tremendous competition,” he said.
Think of the market in front of new-car shoppers, not just the 17 million annual sales, but 28 million – combining new and gently used.
And the share for gently used has climbed from about a third of that market back in 2013 to more than 40% in 2019.
“Many more consumers are being forced into this gently used market, because that’s where the affordable price points are,” Chesbrough said.
“This problem is not going to go away any time soon. We see off-lease vehicles continuing to be a major headwind for new-vehicle sales because of that strong price competition,” he said.
Inside the lease growth
Behind all this off-lease volume is a leasing market that has grown dramatically over the last decade, especially the last four years.
In the 2019 Automotive Industry Trends: Midyear Update report, also released Wednesday, Edmunds said that year-to-date lease penetration was at 32.2% through May, which is the highest in its data set that goes back to 2002.
A year ago, year-to-date lease penetration was 31.5% and in 2017, it was 31.3%. It reached 32.1% through May 2016.
What’s interesting about this growth is that it has occurred amid rising costs of new-car leasing.
On average, the total cost of a lease this year is $19,960, according to the Edmunds report. In 2016, it was $17,996. The average monthly payment on a new-car lease ($536) is up $46 from three years ago, Edmunds said.
Off-lease volume is having an impact on used-car pricing, making them even more affordable.
The price difference between a new car in 2010 and a 3-year-old used car at that time was $8,996, Edmunds said. This year, that difference is $13,535.
Going back to the Cox Automotive data, off-lease vehicle volume is expected to reach a peak of 4.1 million this year (up from 3.9 million last year) and then stay at that level in 2020.
“And it means that the used market is going to remain a hot topic for our industry over the next couple of years,” Chesbrough said. “(There’s) tremendous activity that we’re seeing in used-vehicle sales.”
Where used-car sales could land
That activity to which Chesbrough referred was a bit volatile in the first few months of the year.
Citing IHS Markit used-car registration data, he said January, February and March showed year-over-year declines.
“In April, used-vehicle sales exploded, up 250,000 units over the previous April,” Chesbrough said. “Can’t really explain it, other than we think that there must be something going on with the tax reform.
“And that there was a lot of uncertainty and confusion around what (consumers’) tax liability was going to be, tax returns were delayed – there was just a lot of uncertainty. And those tax returns have a major impact in the used-vehicle market,” Chesbrough said. “Many folks use that money to buy these vehicles or use it for a down payment.”
So perhaps some of these consumers were holding off on purchases in the first quarter until the tax-return dust settled.
Cox Automotive expects used-car sales to come in at 39.2 million this year, down a bit from the 39.4 million used sales in both 2017 and 2018. Further out, they’re expecting 39.0 million used-car sales in 2020.
Adding some context, Chesbrough said the “key question” is in the breakdown by age groups.
The gently used segment is “really dominating the used-vehicle market, and there’s a continuous supply from these off-lease vehicles,” he said, but there is a lack of older-model used cars due to the new-car sales slump during the Great Recession.
“The challenge in trying to figure out what the total market’s going to do (comes from) the vehicles we’re losing due to the Great Recession just because there’s not enough supply,” Chesbrough said. “Can the gains that we’re seeing from newer used-vehicle sales offset the losses that we have” due to low supply from new-car sales during the Recession?
“But on the whole, demand remains quite strong in the used-vehicle market,” Chesbrough said. “We can see that in our auction prices as well.”
Those are at near-record levels and expected to continue growing, which reflects dealer demand for these used cars, as retail consumers continue buying.
Chesbrough expects the used-car retail market strength to continue, as the underlying demand is strong. The “key question,” he said, will be credit availability.
Other forecasts for new, used
Elsewhere in the industry, J.D. Power also shared its forecast for new- and used-car sales.
The company is forecasting the retail new-car sales tally for the first half of 2019 at 6,477,400 units, down 3.3% year-over-year. It’s expected there will be 8,396,500 total new-car sales for the first half, down 1.8%.
“The decline in new sales have been disappointing, but it’s important not to overlook the effect of growth in the used-vehicle market,” said Thomas King, who is the senior vice president of the data and analytics division at J.D. Power, in a news release.
“Used sales at franchised dealers are expected to increase by nearly 9% through the first half. Most significant for retailers is the greater profit opportunity due to higher front-end gross and F&I income earned compared with new vehicles,” King said. “Overall combined new and used retailer profits through the first half are on pace to reach $23.4 billion, up 3.7% from last year. Shifting away from the traditional focus on volumes, 2019 remains on target to be one of the best years recorded.”
Over at Edmunds, they expect 3.4 million used-car sales for June, down from 3.5 million in May. The seasonally adjusted annualized rate is likely to reach 39.4 million, against 39.6 million in May.
Edmunds has pegged the 2019 new-car sales projection at 16.9 million, down from 17.3 million in 2018.
Through May, new-car sales fell 2.4% year-to-date, Edmunds said.
“Automakers are fighting a war on multiple fronts right now: Old cars are piling up on dealer lots, a glut of affordable off-lease vehicles are luring shoppers into the used market, and even with the Fed anticipated to lower rates in July, higher interest rates are here to stay,” said Jeremy Acevedo, Edmunds’ manager of industry analysis, in a news release.
“Strong economic indicators such as consumer confidence and low unemployment are keeping sales at historically elevated levels, but automakers have also been relying a little too heavily on fleet sales to keep these numbers up as well, which isn’t a sustainable model.”
Next up, ALG – which is the data and analytics subsidiary of TrueCar -- is forecasting 9,944,173 used-car sales in the second quarter, which would be 2.4% slower than Q2 of 2018.
It is projecting 3,215,742 used-car sales in June, which would be 4.2% softer than year-ago figures and 5.8% slower than May.
On the new-car side, it anticipates 1,487,407 total sales this month, which would be 0.6% lower than June 2018 on a selling days adjustment basis.
ALG forecasts a new-car SAAR of 17 million for June and believes that will hold for the year.
It is projecting 4,409,295 total new-car sales for Q2, off 2% on a same-selling-day basis.
“Increased incentive spending by several automakers in June in tandem with sustained strength in the underlying macro-economic indicators is helping drive resilient sales for both the month and quarter,” ALG chief economist Oliver Strauss said in a news release. “Given these factors, we are holding our initial forecast of 17M SAAR for 2019 made in January.”