By Ray Birch
LAWRENCEVILLE, Ga.—While reports of high used car prices continue, new data from Black Book reveal the depreciation rate on used vehicles this year will likely exceed the typical annual depreciation rate.
Black Book projects an annual depreciation rate of 18% by the close of 2022, a dramatic turnaround from a 29% appreciation rate in 2021.
The average annual wholesale depreciation rate for used vehicles ranges from 14%-17%.
What has caused the rate to shift into reverse? Falling demand, says Alex Yurchenko, SVP, data science and analytics at Black Book, who added that trying to follow the monthly rollercoaster of rising and falling depreciation this year has been difficult.
Alex Yurchenko
“If you step back on the year and forget about the monthly movements, it will look like a normal year for used vehicle depreciation, and actually, probably a little bit higher than average,” Yurchenko told CUToday.info. “In the first quarter we hit relatively high depreciation, with demand much weaker then. We had a strong spring market that went into the summer, and it was across all segments and across all age groups of vehicles. We saw older vehicles appreciating much higher. And then in Q3 everything changed, and it was driven by demand. Demand was much weaker then—I believe the last nine weeks’ depreciation is close to 1% a week. So, very high depreciation. Typically, we see that in Q4, but we saw very high depreciation increases in Q3.”
Trend to Continue
Yurchenko said Black Book expects to see more depreciation over the next three months.
“Probably not as high the used prices were coming down in the third quarter, though,” he suggested.
Yurchenko said consumers are seeing at least a six-week to two-month delay for the wholesale price declines to show up on dealers’ lots.
Meanwhile, he explained sthe major reversal in the annual used depreciation rate is the result of more than one factor.
“As I said, the big depreciation drop in Q3 of this year was caused by demand,” said Yurchenko. “But the drop in the demand was the result of greater uncertainty about the economy and consumer confidence falling. There is also continued inflation, plus gas prices are still relatively high.”
Change Apparent on Lots
Yurchenko said the change in consumers’ buying habits is clearly being seen on the used car lots of dealers today.
“We're starting to see inventory building up, and the dealers’ days to turn a vehicle are increasing,” he said. “Consumers are not buying at the same level that they did last year when demand was strong.”
While Q4 depreciation may not be as high as what was seen during the third quarter, year-end dealer incentives on new cars make the final period of the year a time of typically high used vehicle price declines.
“This quarter we will likely see more new incentives and a lot of lease returns, as well,” said Yurchenko. “When you look at the big picture, prices are dropping. But we still have such a high mountain (of used appreciation) to climb over compared to any other historical time. So, any drop in prices that we project will still keep us at about pre-COVID levels for the next two or three years. Used prices will still be high.”
Laura Wehunt
The Wildcard
Laura Wehunt, vice president of automotive valuation at Black Book, added a wildcard that could affect used values in the coming months is the effect of Hurricane Ian on used and new car demand, as many vehicles were destroyed in the storm.
“This is something we will be watching, to see what the impact of Ian will be on the market,” Wehunt said. “We generally do get a spike in demand following a major storm. I think people are still trying to sort through what's going on down in Florida, and then also in South Carolina and other places that got hit with flooding.”
Hazard Lights
Wehunt said there will likely be regional differences in used prices due to Ian.
“We will wait to see if the storm impacts the national market,” she said.
Wehunt also cautioned buyers and lenders to be wary of flooded vehicles coming to the market for resale.