KAR Auction Services chief economist Tom Kontos spent the past few days poring over data and information that he’s encountered in connection with Hurricane Harvey; a storm meteorologists are calling a 1,000-year flood event.
Kontos explained in a special edition of the Kontos Kommentary there are four primary considerations for the automotive industry to understand as gasoline prices climb and the full macroeconomic impact likely taking months to unfold.
Kontos began with looking at total loss units versus damaged vehicles.
“Historically, we know that many of the vehicles damaged in a hurricane are not total losses. For example, in 2012’s Hurricane Sandy, of the 250,000 vehicles damaged only about 160,000 were total losses,” Kontos said.
“For the non-flood damaged vehicles, a total loss is only declared if the cost of repairs exceeds a certain threshold versus the vehicle’s value. So the same storm damage — dents, scratches, shattered glass — on one vehicle may be a total loss, but not on another, depending on their relative values,” he went on to say.
As KAR chairman and chief executive officer Jim Hallett referenced during an earlier conversation with AuSM, Kontos reiterated that commercial consigners — including the company’s rental, fleet and captive finance customers — are coordinating with KAR to push more units toward Houston and the Gulf region.
Both Hallett and Kontos emphasized that the 13 ADESA auctions in the area are operational and well-positioned to take on this additional inventory.
“But keep in mind, sellers don’t necessarily have to move inventory into the market pre-sale,” Kontos said. “As we’ve seen over the past few years, the volume of vehicles sold at online auctions is growing.
“Our online capabilities can match buyers with sellers and help them find the specific car or cars they are seeking — and then transport them after the sale,” he continued. “And our analytical capabilities can help advise remarketers on the economic desirability of moving inventory versus selling online.”
Next, Kontos touched on what he’s heard from the client roster held by Insurance Auto Auctions. He explained many insured individuals receive checks for the actual cash value, or the current value, of their vehicle — not the cost of a new model.
“As a result, we anticipate an uptick in demand for quality used cars once claims begin to be paid,” Kontos said. “Timing is an important factor here, given the current oversupply of used vehicles stemming from a surge of off-lease units hitting the market.
“While the number of total loss units is still unknown, IAA expects that number to be significant, and could help mitigate some of the downward pressure on used vehicle values by helping absorb this oversupply,” he continued.
Furthermore, Kontos mentioned the regional dynamics likely in play as Houston and the surrounding areas in Texas and Louisiana try to bounce back from Harvey.
“At the micro-level, trucks are very popular in Texas and have resisted the price softening we’ve seen with cars,” Kontos said. “Trucks are holding value better, in part, because gas prices have been low and the supply has been tighter compared to cars.
“The net impact is there will be an increased demand in this region for trucks and SUVs as people seek to replace their total loss trucks and SUVs. Compared to cars, sellers may find more price justification to move truck inventory to Texas,” he went on to say.
Kontos closed with a message to dealers, especially franchised operations that saw vehicles submerged by Harvey’s record rainfall.
“For Houston-area franchise dealers trying to replace damaged inventory, obtaining used car inventory at a time like this may be their best immediate option and value,” Kontos said. “Floor-planning quality used cars is more affordable than new cars, and the current oversupply of off-lease used vehicles means these vehicles are quickly and readily obtainable.
“And a stable of quality used cars will ready-match dealer supply to demand as consumers seek to affordably replace their total loss vehicles,” he continued.
“In summary, Hurricane Harvey is a devastating event for which the whole-car and salvage auction industry stands ready to respond through efficient vehicle disposal and replacement with an abundance of supply,” Kontos concluded.