By Ray Birch
LAWRENCEVILLE, Ga.—Lenders should be prepared for a marked drop in used car values near the end of this year—something to watch as repossessions will likely mount as the pandemic persists.
Analysts are predicting several factors will lead to a large number of used vehicles returning to market, driving used values lower, including a glut of fleet and rental car vehicles will force a large sell-off on the wholesale auction lanes, more repossessions will happen, and many leased vehicles will come back to market due to dealers extending leases now as a result of the pandemic.
As CUToday.info has reported, many auto dealers are making it difficult for consumers to turn in their leased vehicles, encouraging them to extend their lease until later in the year.
“That will be an issue for used prices by the end of the year,” said Laura Wehunt, vice president of automotive valuation at Black Book. “Dealers are extending lease terms now due to the pandemic, shoving those to the end of the year. So there will be a large number of off-lease vehicles coming back at once, which will drive down used values.”
There are also “fields” of used rental cars sitting at auctions, waiting for the lanes—and buyer interest—to once again hit the gas, she said.
“The auction lanes are actually having to lease additional space to keep these vehicles,” Wehunt said. “But those cars are going to eventually cross the lanes.”
A Roiled Market
The market is already being roiled. Black Book recently reported used car values during the pandemic have fallen at a faster pace. Black Book’s Used Vehicle Retention Index for April (114.6) showed a 7.9 point drop from March (114.6)—the Index’s largest drop since its inception in 2005.
Black Book is also watching repossessions.
“You’ve not had financial institutions doing repossessions now because of the health crisis,” noted Wehunt. “But those will start back up, possibly at a greater pace. That too will put more used cars on the market and drive down prices.”
Turning to new car sales, Wehunt said Black Book is not moving off its latest projection of 12.7 million units for the year—well below the 16.5-17 million units sold in recent years.
Laura Wehunt
However, as CUToday.info recently reported, there are signs new cars sales are slowly coming back. On the West Coast, where restrictions were first lifted, sales have been above areas in which stay-at-home orders have remained in place, PureCars reported.
Strength in Southern U.S.
Wehunt said Black Book is seeing the same scenario in states where restrictions have been loose during the pandemic and lifted recently.
“So in Georgia, Texas and Florida, we’re seeing people buying cars again, giving us an idea of what we’ll see when consumers get moving again,” Wehunt said. “We have heard some of these dealers saying that they are now in a better position than they thought they would be. No question sales remain down, but in some places it’s not as bad as what was expected.”
Wehunt noted many dealers are now looking for inventory, as extremely attractive incentives have led to the depletion of their stock of new vehicles, since automakers have shut down production during the crisis.
“We even had one dealer go back to an upfitter, who they sold some base trucks to, and buy back their trucks so they could have trucks on their lot,” Wehunt explained.
An upfitter typically buys base-model vehicles from dealers and adds features and components to them.
Better Than Expected
Black Book isn’t alone in its view. Origence reported that although there was definitive market constriction in Q1 due to the COVID-19 pandemic, overall performance for credit union auto loans was “better than many may have expected.”
“The quarter was bolstered by a strong January and February before COVID-19 hit us hard as a nation in March, and loans fell dramatically,” said Bob Child, COO of Origence. “Credit union auto loan application volume through the CUDL auto lending platform was on pace with last year at this time through the first two months of the year, then those volumes bottomed out the week of April 1. However, over the last month we have seen application volumes gradually increase on
Bob Child
a daily basis.”
With many states starting to reopen as of May 10, Origence is expecting volumes, particularly in used cars, to re-emerge.
“We believe as the auctions start coming online there will be a demand for used cars, particularly from those who relied on public transportation, or Uber or Lyft services, as a primary transportation resource will be looking for a safer alternative,” said Child.
The State of the States
While states in the Western U.S., including Arizona, are seeing improvements, it is an uneven recovery that reflects the level of shutdown still remaining in each state, noted Child.
“In Nevada, where casinos remain closed, auto volumes have not yet improved. In California, it varies county by county, based on what is being allowed and restricted—from total shutdown of dealerships, to online only sales, to remote sales, and/or dealers that must adhere to social distancing requirements on their car lots,” said Child.
The chart below shows the credit union application volumes through the CUDL platform on the West Coast vs. the nation as a whole.
