Used-car market poised for a bigger share of the action

Look for the used-car market to account for more vehicle sales this year.

Despite predictions that 2001 new-car sales will drop by about one million units — to about 16.3 million — compared to 2000, the used-car market probably will gain ground.

That's according to Manheim Auction's sixth annual Used Car Market Report, released at the NADA Convention in Las Vegas.

“If the projections for a softening economy are indeed true, we'll see the used-vehicle side take on even more importance,” says Tom Webb, Manheim's chief economist and author of the report.

He adds, “Traditionally, when times get a little tougher, the focus — for dealers and consumers alike — moves to used cars.”

Recent years have been great for both new- and used-vehicle sales.

In 2000, new-car sales hit 17.4 million units, used-car sales, 41.7 million units. Those transactions reached a record $744 billion — $380 billion for new vehicles, $363 billion for used.

Strong new-car sales and leasings in recent years have moved many prime vehicles into the used-car market. Moreover, scrappage is less for older units because they're staying on the road longer due to quality advancements.

“Selling 17.4 million new vehicles in 2000 means that 17.4 million units need to be remarketed,” notes Mr. Webb.

Used-vehicle prices are relatively flat, he says, while new-vehicle prices have effectively declined — if incentives and more value-added standard equipment are factored in.

Inflated residual predictions on leased vehicles of late isn't evidence of a weakness in used-car prices, says Mr. Webb.

“Because someone setting a residual said three years earlier that a vehicle would be worth $25,000 coming off lease, and, in fact, it turned out to be $22,000 doesn't mean the price is weak,” he says. “It means someone set a wrong residual.”

He predicts that within two or three years, residuals will be more in line with actual market values as residual setters become less aggressive in their predictions.

If the used-vehicle market indeed accounts for a larger share of vehicle transactions this year, Manheim Auctions is poised for the added action, says its new president and CEO, Dean Eisner.

Manheim plans to spend $200 million in 2001 to upgrade, expand and build auctions. That's double what Manheim averaged annually for the last five years, says Mr. Eisner.

About 3.3 million vehicles are coming off-lease this year, and Mr. Webb expects 62% will go to auctions.

Overestimated residuals contribute to that, because usually “neither the dealer nor the customer wants to take possession of an over-residualized car coming off lease,” says Mr. Webb.

Up the road, he anticipates a slight decrease of vehicles going to auction as the gap narrows between forecasted residuals and actual values, thus increasing the likelihood of customers or dealers taking possession of off-lease vehicles.