By Ray Birch
LAWRENCEVILLE, Ga.—Used car prices were surprisingly strong in 2020, and now Black Book is projecting that same trend could hold true for a good portion of 2021—but for different reasons.
Last year prices on used vehicles held steady and even increased due to a lack of production of new cars, with plants shutting down due to the COVID-19 crisis. This year, new car production is expected to be down due to a shortage of microchips for vehicle computers.
“The strength of the used car market last year, particularly in the summer, was driven by three main reasons,” Alex Yurchenko, senior vice president, data science at Black Book, told CUToday.info. “We had crazy high prices during the summer because people had money from the massive federal stimulus. At the same time we had issues and shortages with new inventory for the summer and into the fall.”
Another factor: A limited number of lease returns to add to used inventory, explained Yurchenko, as many of those returns were pushed into later in the year due to the pandemic.
“Used prices just went through the roof,” said Yurchenko.
That contradicted what many experts, including Black Book, has predicted at the start of the health crisis--that used car values would plummet in 2020, especially at the end of the year.
“The strong values, we see a very similar picture for 2021, but for a different reason,” stated Yurchenko. “We are going to have a shortage of new car inventory this year because of…a shortage of microchips. It's affecting most of the OEMs, and expectations are that even in Q1 there will be 200,000 fewer new vehicles produced.”
If a new round of stimulus checks are issued--and the legislation is now back before the House to hammer out differences in legislation passed by the House and Senate–will also help keep used prices up, added Yurchenko, as consumers will have more money to make car purchases.
Alex Yurchenko
Combination of Forces
“There are forces combining now to help used prices,” said Yurchenko. “For the first half of the year used prices will be very strong.”
After the first six months, typical used value depreciation will kick in, predicted Yurchenko.
“Then we will probably see typical performance for used cars. But I imagine, for the year overall, depreciation is going to be less than 10%,” said Yurchenko.
Traditional used car depreciation is 15% to 17% annually.
Ready For Anything
After what occurred with used values in 2020, in a season in which prices were first expected to nosedive, Yurchenko said nothing would surprise him in the used space this year.
“One thing last year made very clear is that supply and demand models work perfectly,” said Yurchenko. “If you have high demand and low supply prices will just go through the roof.”
Another very good sign for used values this year, and for overall vehicle sales, he said, is the spring buying season appears to have gotten off to an early start.
“Typically the spring season starts somewhere in March, and here we are six to seven weeks into the new year and used prices are starting going up because there is demand. Again, that does not typically happen until the middle of March.”
Could Bottom Fall Out?
But could the bottom possibly fall out for used values if lease returns, pushed back by the pandemic, pick back up and more repos hit the hit the market this year as the moratorium for repossessions ends?
Yurchenko doesn’t believe so.
“The huge Federal stimulus last year did two things. It put a lot of cash into the economy, stimulating demand for cars sales and stopped the economy from falling off a cliff,” Yurchenko said. “There was a moratorium on repossessions—lenders just let people drive their cars without making payments for a while.”
But Yurchenko does not believe repossessions will be signficant in 2021, outside of what occurs during a typical year.
“Repossessions may increase by 10%, possibly 20%, but the market can absorb that without creating any issues,” stated Yurchenko.
Laura Wehunt
During 2020 the used market also absorbed the additional cars rental companies returned to the retail space, downsizing their fleets to address consumers’ cutback in travel.
“They de-fleeted at a perfect time last year,” explained Yurchenko. “They put cars back onto the market when demand was high and people had money. The timing was perfect.”
Adjustment By Rental Companies
Laura Wehunt, vice president of automotive valuation at Black Book, added rental car companies won’t face the same issue this year, as they already cut back on their new car purchases last year and this year consumers are returning in greater numbers as more people become willing to travel in 2021.
“I think we will see lower levels of rental cars return to the market this year,” she said.