Vehicle Market Forecast: Partly Cloudy, Maybe Rain

“Partly cloudy with a chance of rain” is the forecast, not of the weather, but of the U.S. used-car market. That prediction comes from Anil Goyal, vice president-operations at Blackbook, a tracker of vehicle values.  

In a WardsAuto Q&A, he talks about weakening preowned vehicle residuals, the prospects of automakers laying on new-car vehicle incentives to move the metal this year and the possibility of a car comeback in an SUV world. (He doesn’t talk about the weather.) 

WardsAuto: Why partly cloudy with the possibility of rain for used vehicles?

Goyal: With the used-vehicle supply continuing to increase (particularly as millions of off-lease vehicles enter the preowned vehicle market), values will be more depressed than they have been in the last year.

The 2017 sales were helped by the hurricanes. A lot of people had to replace their damaged cars. That created demand.

This year it depends on the economy. If more jobs are created, that used supply will be absorbed well. But if the economy slows down, that’s when it starts to rain.

WardsAuto: What about residual values for preowned electric vehicles?

Goyal: Battery-electric vehicle retention rates are 10 points below those of similar gasoline-powered vehicles. We expect that disparity to reduce as more EVs enter the market and the charging infrastructure improves. But EV values have bounced off the bottom in the past several months.          

WardsAuto: And new-car values?

Goyal: Those are pretty much determined by manufacturers. That’s where the incentives are. Those can reduce values. But transaction prices generally are increasing because of the trend toward more SUVs and pickup trucks. In general though, the consumer is getting more deals with more cash on the hood or better leasing terms. From that perspective, there’s been more manufacturer incentivization and discounting.

But really, when the vehicle gets financed and leaves the lot, it becomes used. New-vehicle value is determined by MSRP minus the incentives.  

WardsAuto: What about those incentives? You have indicated automakers are showing discipline in not over-incentivizing 

Goyal: We are seeing signs of it.

WardsAuto: Of discipline or over-incentivizing?

Goyal: Discipline. But when times get hard and sales start to drop (predictions range from 16.4 million to 16.7 million light-vehicle sales in 2018 compared with 17.1 million last year) incentives can pick up. Manufacturers by and large are resigned to the fact that sales will slow down and they are trying to adjust production schedules.      

WardsAuto: We have seen what happened in the past when they don’t decrease their production schedules during a down cycle and just keep pushing out product. It’s not pretty when it comes to damaging back-end residuals. Do you think they’re going to make the same mistake this time?

Goyal: There will be certain segments, such as midsize and small cars, where consumer demand is not as high. There will be more incentives thrown on that side. Production now is more tilted toward SUVs.   

WardsAuto: I’m not asking you to name names, but are some automakers better at keeping control of incentives?

Goyal: Yes. It depends on what (senior management’s) objects are. If the objective at the top is (fixated on) more market share, every discipline goes by the wayside. But if the manufacturer and the captive lender together are thinking through more from a profit perspective, that’s where discussions become more fruitful as to what it means to the manufacturer when leased cars return in two or three years.

If automakers are putting on high incentives premised on the residual being $15,000 in a few years and it really ends up as $12,000 or $10,000, they are going to take a hit on the backend.   

WardsAuto: Why do you suppose the car segments have taken such a dive in the U.S. market?

Goyal: It started with the gas prices. In 2014, we saw those decline precipitously. That spurred the emergence of SUVs and led to consumers buying larger vehicles. That trend continued, and when people saw more of their neighbors driving SUVs, the reaction was, “That’s pretty good.” It’s a versatile vehicle. There’s the ease of getting in and out, the feeling of safety, the being up higher, the cargo area. Those factors have influenced changing consumer behavior. But it started with the lower gas prices.       

WardsAuto: It used to be with SUVs that you traded off with ride and handling, sacrificed with fuel economy and faced the possibility – maybe overstated – of SUV rollover accidents. But automakers have addressed all three of those issues, haven’t they?

Goyal: Yes. Even if the gas prices go up a bit, that consumer sentiment for SUVs will stay. If there were some disruption in the oil market that spikes gas prices, then that could result in compact and midsize car segments coming back strong. 

WardsAuto: Do you think that would happen?

Goyal: We have done a scenario analysis on the impact of higher gas prices, and it indicates that.

WardsAuto: Who would buy a small car in those circumstances?

Goyal: We’ve seen some of the compact cars getting a lift from the bottom as values have declined so much, especially in the current market of the tax-refund season.

Lower-valued vehicles get a pretty good lift. People are looking for lower payments. And financing criteria is tightening; lenders want higher down payments. It causes some car shoppers to say, “Well, I just need something to drive to work.”

If there is a difference of, say, $4,000 between a compact SUV and a compact car that could influence the monthly payment and consequently the decision of which one to buy.

WardsAuto: And the buyer would typically be someone single, someone without a big family to cart around?

Goyal: I’d say more of a subprime buyer, so family size doesn’t matter. It’s more about needs and finances. That’s why we are seeing compact-car values staying pretty stable. When the price goes down, it influences the demand.

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