No doubt about it, the used-vehicle market is experiencing some shifting trends that we all knew would take place in the fall. After a few years of short supply, pricing strength and fluctuating gas prices, dealers now find themselves with an easing of supply pressures. Much of this shifting trend can certainly be attributed to seasonality, but everything from a Japanese Tsunamis rebound to a steady period of new-car sales also has a heavy hand in where we are today.
The beginning of 2012 saw a spike in gas prices earlier than its usual and gradual run-up to Memorial Day. Predictably, sales of smaller vehicles responded with higher demand. What surprised us most, though, was that sales of trucks held steady once the initial price spike settled in to an average of $4 a gallon. Over the last 30-60 days when gas prices started to fall, we have tracked less aggressive pricing especially throughout the car segments. And while we expected strength in trucks to climb as a result, only a handful of truck segments like compact SUVs and mid-size SUVs have shown strength and support in wholesale pricing.
This time of year, though, dealers are shifting gears as the 2013 models are hitting the car lots and showrooms. While this annual shift has been gradual over the last several weeks, vehicle valuations primarily have changed and 2012 models have now experienced their first birthday.
Throughout summer, dealers have been making room for the 2013 models, which means they haven’t been as aggressive in pursuing the 2012 models. In response, 2012 values have adjusted downward by an average of 10 percent. Dealers carrying inventory of one to two years in age will feel a larger valuation adjustment compared to those carrying inventory comprised of four or more years. However, all dealers will feel the adjustment, which takes place across the board.
As any dealer will tell you, this change in values will not happen suddenly and it also will not happen all at once. We have been seeing this gradual change in the auction lanes over the past several weeks, and by now many dealers will be seeing this valuation change on 2012 models compared to prices during spring. Dealers can expect to see a drop in value as high as $1800, depending on supply, demand and production cycles.
Segments to watch
The changing of the guard is not discriminated by any one particular segment, as everything must find its new price point to allow for the 2013 models. Drivers of this change are comprised of the cost of the vehicle to the consumer, but also partly driven by financing models and overall price.
As an example, the drop in dollar figure will be greater for a 2012 model in the premium segment, compared to one in the entry-level compact segment. If there is not a lot of volume coming on a vehicle with healthy demand, the depreciation for that 2012 vehicle will not be as great as one with a lot of inventory. We saw an example of this during the fall of 2010 with the Buick Enclave, which had tight supply and high demand in spite of the arrival of the 2011s. Dealers will also have to keep a watchful eye on manufacturer production cycles, which are sometimes slowed by design to prepare for the new model year.
Another key component to watch includes differences in the 2013 model compared to previous editions. Is the 2013 vehicle a plain carryover? Is it refreshed in some areas? Or perhaps the 2013 is a complete redesign with a rebuilt and enhanced engine? Answers to these questions will alter the overall price on the 2013, and may also impact the demand for the 2012 models in the buyer’s eye. Sometimes slight changes occur and do not have a drastic effect on the valuation drop with the incoming model.
As an example, the 2013 Chevy Equinox and Terrain will have a new and larger displacement V-6 engine, a change that isn’t expected to drive a significant difference for the 2012 models. The 2013 Ford Fusion, however, is slated to have significant changes in fuel economy and design compared to the 2012 model. This could drive values down more than normal on the 2012 Fusion.
Typically, a redesign on appearance will most likely have a larger impact on value compared with fuel economy. As we all saw earlier in the year, even with higher gas prices, demand for fuel-conscious vehicles remained subdued. What’s more, buyers of used vehicles are more interested in price and functionality compared with fuel economy.
In terms of residuals, the level of retention will be less on 2013 models than it was the previous two years since the used-car market is not estimated to be as strong by 2015 and 2016, mostly driven by more ample used supplies. As evidence of this, we are expected to see an additional 900,000 vehicles this year from trade-ins on increased new-car sales.
Assuming sales continue to grow throughout 2013, this trend for used-car supply should continue. Dealers that are prepared the most will be the clear winners during this year’s annual new-model transition period. Watch inventory turns, continue to be concerned about the level of collateral in inventory, and don’t keep vehicles in stock for too long.
The market will continue to depreciate over time at a slow pace, and it will be important for dealers to closely monitor their days-to-turn rates.