By Ray Birch
LAWRENCEVILLE, Ga.—Get ready for a 30% depreciation in annual used vehicle values this year.
The record-breaking drop in annual value, forecast by Black Book, is due to several factors, the biggest being the Chapter 11 bankruptcy filing by car rental giant Hertz, which is expected to lead to the company dumping hundreds of thousands of its cars onto the used car market in 2020. Typical annual used vehicle depreciation is around 15%. In 2019, the annual depreciation was 16.8%.
As CUToday.info has reported, used vehicle values were already expected to dive by the end of the year, and the news of the Hertz bankruptcy has made the forecast even more grim.
Black Book cautions that lenders should be running scenarios on their portfolios regarding their exposure to delinquencies and falling collateral values.
“We have never seen this kind of depreciation before,” said Alex Yurchenko, SVP of data science at Black Book. “The last recession was tough, but the depreciation came over a longer period of time. But this time we're going to take a big shot at once.”
Many Factors Merging
The forecast for the steep decline in used values is coming at the same time auto loan delinquencies are rising sharply. Economist Elliot Eisenberg, during a recent Origence webcast, noted the increase in delinquencies, saying the fastest growing segment falling behind on their auto loans is borrowers between the ages of 40-49.
If repossessions rise sharply as a result of the pandemic, and even worsen if COVID-19 again spikes during the winter and the country shuts down again, lenders could face a rash of repossessions on vehicles whose values have markedly fallen.
“Lenders just need to be very aware of what's going on, and just be prepared,” said Yurchenko. “It seems this time around, compared to the Great Recession, lenders are much more prepared for this downturn.”
Hertz, with a fleet of about 700,000 vehicles, is expected to put most of those cars back into the used market, albeit not at one time.
“That is really physically impossible. You just can’t sell that many cars at once,” acknowledged Yurchenko, who expects Hertz to sell the cars over the course of this year and 2021.
Company Not Alone
Hertz isn’t alone. All vehicle rental companies have seen significant declines in their volume of business, and are making their own plans to sell off more of their fleets.
Laura Wehunt
“We think this will put another .25 million additional rental cars on the used market this year,” said Yurchenko, noting that in a typical year the auto rental companies send about two million vehicles to the auction lanes. “So 2.25 million this year.”
Ultimately, said Yurchenko, whether Hertz dumps its cars at once, or steadily over the second half of the year really won’t impact the forecast.
“If they do get rid of their cars faster than we expect, then used values will just take a much harder hit this summer, but we will still end the year at 30%,” Yurchenko said.
Other factors leading to the big depreciation number are the unemployment rate and low consumer confidence, which has reduced the interest in used vehicles. Moreover, a sizeable number of off-lease vehicles are coming back this year, and repossessions are expected to climb before December, adding to supply.
“Unemployment is close to be 20%, GDP is way down, so this is a perfect storm of oversupply and weak demand,” stated Yurchenko.
Some Good News
There is good news, however, as used and new car sales have been rising recently.
Laura Wehunt, vice president of automotive valuation at Black Book, told CUToday.info the auction lanes are seeing increased activity.
“Following April, which posted the biggest one-month decline in used values ever, what we're seeing now is really business has come back,” said Wehunt. “We are seeing a lot of activity on the auction lanes and dealers are needing inventory.”
Wehunt said the recent demand for used cars is likely being driven by stimulus checks, tax refunds and pent-up demand from the state lockdowns.
“Credit is being extended and there have been additional unemployment benefits…all these things have come together to drive demand right now,” said Wehunt. “The auction lanes are getting back, somewhat, to the pace they normally see this time of year. We know there certainly is used supply.”
Others have also pointed to signs of recovery from the collapse of auto sales during the coronavirus pandemic, especially as more states begin to loosen up their stay-at-home restrictions. Preliminary data from some of the nation’s largest manufacturers suggest retail consumers are beginning to come out and look for cars and trucks, noted Brian Turner, president and chief economist with Meridian Economics.