Used-Car Market Brightens

The used-car market has brightened this year, but “it would be naive” to suggest clear sailing is ahead, says Tom Webb, chief economist for Manheim Consulting, a division of a major used-car auction firm.

Reasons for the upswing? Used-car sales do better than new-vehicle sales in recessions as consumers cut back on spending; dealer margins have been enhanced by a smaller wholesale supply due to fewer trade-ins during the current new-car sales slump; and pre-owned wholesale pricing has increased significantly.

So says Webb, lead author of the first Manheim Mid-Year Used Car Market Report, an offshoot of Manheim's established annual report.

“However, a lasting recovery demands more,” Webb says. “It demands jobs, credit and a financially strong dealer network. It is possible that all of these will start to come into place in 2010, but not before that.”

He's optimistic the recession will end soon but predicts major sectors of the economy — housing, automotive and finance — “will remain debilitated for some time” because of the blows the suffered in the economic downturn.

Used-vehicle sales continue to outperform new-vehicle sales, the mid-year report says.

New-car sales dropped to a 42-year low during January to June, while retail used car sales were up 2.3%.

The federal government's “Cash for Clunkers” program has boosted new-car sales. But “used-vehicle sales are inherently more stable than new vehicles, and dealers take advantage of this,” Webb says.

Yet the unprecedented macroeconomic environment of 2008 meant that “even the safe harbor of used vehicles became dangerously choppy, particularly in the fourth quarter when retail financing seized up,” he says.

The used-vehicle market, both wholesale and retail, began stabilizing in 2009.

“Unlike new-vehicle demand, which can be deferred, used-vehicle buyers are more often motivated by need,” Webb says. “As such, the used-vehicle market has always exhibited less cyclicality than new vehicles.”

He cites 2008, when the new-car sales drop was double that for used cars.

The inherent stability of used-car sales stems from the massive size of the market (more than 40 million sales in a typical year) and the diverse consumer segments served.

“Potential used-vehicle customers range from buyers of nearly new luxury units to customers in need of basic transportation from a buy-here, pay-here dealership,” Webb says.

Buy-here, pay-here operations rely on dealer-supplied financing, often supported by lines of credit from local banks. Such used-car dealers have seen a consistent demand, but greater difficulty with collections as their customers suffered job losses.

“BHPH is not an easy business, with dealers typically investing as much effort in collecting on their loans as they do generating new business,” Webb says.

Recent dealership closings have had little impact on used-vehicle values, according to Manheim. Prices have risen about 5% in the last year.

As Chrysler Group and General Motors Co. closed dealerships, and affected dealers cleared out their inventories, there was some concern about used cars potentially flooding auction lanes.

“That didn't materialize,” Webb says.

Chrysler dealers tended to retail most of their new- and used stock to bargain hunters and surviving dealers, he says.

Cut GM dealers have until third-quarter 2010 to exit the business. “Even though many of them will close before that date, there should be little impact on wholesale prices,” Webb says.