Economist: Dealers Will Sell the Benefits of Used Vehicles

U.S. car dealerships are cranking up their used-vehicle operations as consumer credit continues to tighten and confidence declines.

Manheim Consulting says in its monthly Used Vehicle Value Index that wholesale used-vehicle prices — on a mix, mileage and seasonally adjusted basis — rose 0.7% in August, compared with the previous month.

Prior to the seasonal adjustment, prices were up 1.4%. Looking forward, Manheim sees retail used-vehicle sales exhibiting their traditional stability.

In comparison, Manheim says the economic environment will continue to deteriorate with respect to consumer purchasing power.

Year-over-year, used vehicle prices have dropped 3.8%, according to Manheim tracking.

“With manufacturers continuing to bite the bullet by cutting production, rather than artificially propping up new-vehicle sales, dealers will be increasingly able to sell the benefit of buying used,” says Tom Webb, Manheim's chief economist and compiler of the Index.

The key, Webb says, “is acquiring inventory in the segments and price points that consumers want and lining up lending sources that will provide the credit terms buyers need.”

Webb says vehicle auctions are the truest form of price discovery.

“But since bidding and selling inevitably entail individual expectations and risk assumptions, it is not abnormal for prices to swing outside of true balance,” he says. “That is probably the simplest and truest explanation for the rebound in pricing for fullsize pickups in August.”

Fullsize SUV prices also increased slightly in the month.

“To be sure, it would be a stretch to call pricing in these segments strong,” Webb says. “Over the past year, prices for fullsize pickups and large SUVs were down 18% and 23%, respectively.”

Pricing in those segments has improved, and Webb predicts pickups and SUVs will be facing considerably easier year-over-year comparisons in the coming months.

Manheim says employment declined for the eighth-consecutive month in August, for a year-to-date loss of 605,000 jobs. Initial jobless claims remained elevated and overtime hours fell to their lowest level since May of 1991.

In addition, wage and salary growth over the past three months slowed to a 3% annual rate. Meanwhile, consumer credit-card balances have risen.

“These fundamentals point to a significant pullback in consumer spending,” Webb says, noting declining gas prices “will provide relief to many households.”

Webb expects the effect of lower gas prices to first show up in lower auto-loan and credit-card delinquencies, rather than more new-vehicle purchases.