Wholesale auto market trends to track in 2018

LA QUINTA, Calif. - 

Used-vehicle supply and demand, the economy, and interest rates and credit are among the market dynamics driving wholesale used-vehicle sales and prices. 

They were also frequently cited as trends to watch in 2018, by analysts, remarketers and others who attended Used Car Week in November.

The National Auto Auction Association held its 69th annual convention in conjunction with the National Remarketing Conference portion of Used Car Week. Here are some trends and insights shared during panel discussions and on the sidelines at the conference.

Off-lease trucks come rolling in

Yes, off-lease vehicles are still front and center, and is there any wonder? About 300,000 more off-lease cars and trucks will return to the market in 2018 than in 2017, bringing the total to 3.9 million, Cox Automotive predicts. Jonathan Smoke, Cox Automotive chief economist, said used-car unit sales in 2017 would increase roughly 2 percent and continue to rise in 2018, aided by new-vehicle prices that are beyond the budgets of many households. He is also monitoring new-vehicle sales, which he believes will drop to around 16.6 million in 2018.

Crossovers and SUVs, which became very popular on the new-vehicle side three or four years ago, will start to enter the used-vehicle arena in more appreciable numbers in 2018, Smoke said.

“If you label 2018, the key word is continuation; what we’ve seen sets the stage for the future,” he said. “I think the shift away from mid-size cars (to crossovers and SUVs) is a long-term deal, and the used-car market is going to gradually catch up with it.”
In the meantime, truck prices are holding up better than car prices, but that is beginning to change, too, said Tom Kontos, chief economist at KAR Auction Services Inc.
Price analysis of used mid-size cars and used mid-size SUVs over the last several months indicates that “trucks have lost a little of their sizzle,” said Kontos, who expects the trend to continue.
“For a while the SUVs were outperforming cars; it’s about even now,” he said. “They’re pretty much behaving the way the rest of the market is.” Kontos also predicts that the additional used-vehicle volume in the marketplace will lower prices by 2 to 3 percent in 2018.

Volume, repos and the economy

National Auto Auction Association chief economist,Ira Silver believed that auction sales volume would be up about 3 percent for 2017 and grow another 2 or 3 percent in 2018. He based that prediction on another prediction: 2018 new-vehicle sales will fall, but have a soft landing at 17 million.
“I think the economic fundamentals of the consumer sector are so strong with low unemployment, the wealth effect of increasing stock prices and housing prices, I think we could get a 17 million year,” Silver said.
Kontos has his eye on vehicle repossessions, which he predicts will rise this year, not because people are defaulting on their loans at a faster pace, but because of record new- and used-car sales over the past few years.
“The current level of default rates on auto loans is in the range of 1 percent; if you have a bigger pie, that becomes more repos,” Kontos said.

Credit and interest rates

Michael Vogan, assistant director, economist, at Moody’s Analytics, is particularly interested in auto loan default rates, which he agrees are trending upward, especially in the deep subprime sector.

Vogan notes that credit is tightening — “as it has been since the second quarter of 2016” — a factor that will help shift more vehicle sales to the used-car market from the new-vehicle market.
Interest rates are also top of mind. Smoke, who called the interest rate hike in December by the Federal Reserve “a given” said if interest rises three times in 2018 as widely expected in economic circles, credit will become tighter across the board.
“Dealers will have higher expenses for floor planning as well as consumers for loans,” he said.

New car incentives, leasing

Larry Dixon, senior director, valuation services at J.D. Power, is watching new-vehicle incentives, which he believes will continue to grow in 2018 — representing “one of the biggest negative drivers we see from a used price standpoint over the next couple of years” — but at a slower pace than the double-digit increase the industry saw in 2017.
Incentives were expected to finish 2017 at an average of over $3,900 per unit, representing “an all-time high,” Dixon said. 
Leasing accounted for “over 30 percent” of new-vehicle sales in 2016, dropped to “roughly 29 percent” in 2017 and is expected to dip again in 2018, because falling used-vehicle prices are putting downward pressure on residual values, Dixon said. As leasing loses luster, manufacturers “will put more money in cash incentives or finance incentives, particularly as interest rates start to rise,” he predicted.

Data analytics

Also commanding attention at the conference was that auction companies and others are investing heavily in developing data analytics to assist manufacturers and dealers buy and/or sell more used-vehicles, more efficiently. Take Black Book.

Among its offerings is scenario analysis, which uses a wholesale customer’s purchase and sales history to devise individualized strategies to weather various market situations, such as an economic downturn or skyrocketing gasoline prices, said Anil Goyal, Black Book senior vice president, automotive valuation and analytics.

“We have data scientists working and we provide very custom analytics depending on the needs of our customers,” he said.

Into the future

The future is always just around the corner and it bears watching said Marty Blue, senior vice president, business development at CarGurus. 
Technological strides in autonomous driving and electric cars, growing popularity of ride-hailing services such as Lyft and Uber and alternative retailers, such as
Carvana, which delivers used vehicles to consumers’ doors or via giant vending machines in some markets, are trends no one should ignore, she said.
But “they probably won’t have much of an impact in 2018,” she added.

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