BLACK BOOK – Here is a quick recap of the news from the last week in July: 

  • Wholesale prices, fueled by shortages of new and used inventory in addition to auctions’ throughput limitations, continued their ascent last week, although at a slower rate compared to the first several weeks of July. 
  • Retail listing prices showed accelerated increases during the last week and remained above pre-COVID-19 levels.  
  • Wholesale volume had a slight dip in the last few weeks, as used inventory remains limited and many dealers are searching for alternative ways of acquiring inventory. 
  • Used retail listing volume has stabilized at levels significantly lower compared to last year due to two factors: overall used inventory is lower, while many units in good condition are presold before they even get listed online. 
  • July saw some improvements in new vehicle sales – about 1.2 million units were sold (vs. 1.1 million in June). It was a 12% drop compared to the same time last year. The industry is down 22% for the first seven months compared to 2019. 
  • New to this weekly update, we launch a section dedicated to BEV (Battery Electric Vehicle) sales.  We review Black Book’s projections on BEV Sales and why we believe the changes are more evolutionary versus revolutionary in the electric space. 
  • The economy gained almost 1.8mm jobs in July, a sharp drop from June’s gains, according to the Labor Department. 
  • These gains helped the unemployment rate drop to 10.2% in July, a rate still well above the unemployment levels reached during the Great Recession. 
  • Weekly initial unemployment claims dipped slightly last week but remained above the one million mark as more Southern states are experiencing a surge in the number of new cases and deaths from COVID-19.  
  • Extended federal unemployment benefits expired on July 31st.  Leaders of both political parties and the White House are still negotiating a second package, although President Trump issued an executive order (that will most likely be challenged in courts) to extend some of the federal benefits. Without substantial and sustained federal stimulus, demand for used vehicles is expected to deteriorate.  
  • A recently released Senior Loan Officer Opinion Survey on Bank Lending Practice for the second quarter showed a record high tightening of auto credit. 
  • Carvana, an online used car retailer, released a letter to shareholders covering financial results from the second quarter. The letter noted how sales volume increased but profit per unit decreased as the cost of used inventory continues to increase.  
  • McKinsey released a study examining, among other things, consumers’ intent to buy a vehicle: 
    • New car purchase intent is 26% down vs. pre-COVID-19 levels 
    • Used car purchase intent is 24% down vs. pre-COVID-19 levels 
    • A third of consumers plan to spend less on their next vehicle 

Last Week’s Highlights from the Wholesale Market 

Volume-weighted, overall car and truck segments both showed gains for the eleventh week in a row, increasing 1.08% overall this week (compared to 1.01% the prior week). As for specifics, the overall car segments increased by 1.03% (compared to 0.96% the prior week), and the overall truck and SUV segments increased again this past week at 1.10% (compared to 1.04% the prior week).  

The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans for the last several months. We have now experienced eleven weeks of overall market rebounding with consistent week-over-week increases in almost all segments. 

News from the Retail World (Used and New) 

  • New Vehicle Sales 
    • New car deliveries are finally increasing for dealers, especially on vehicles that are produced in the US that benefit from a shorter window of time between start of production to delivery. Although this hasn’t stopped many of these deliveries from being pre-sold prior to delivery, leaving dealers still struggling to have inventory on the lot for consumers who feel more comfortable shopping and purchasing vehicles in a more traditional manner.  
    • Not all manufacturers are reporting their sales numbers monthly, but the ones that have released July numbers are showing a mixed bag of results. Toyota reported a profit, after sales rebounded following the drop experienced at the start of the pandemic. Unfortunately for Honda, the result was not as positive, as they reported an overall loss, but they are expected to rebound and finish the year profitable. 
  • Quality trade-ins have become more important than ever as a source of inventory, and dealers are finding themselves having to step-up in the value they are offering consumers for their trades.    

What Comes Next? 

As more used inventory reaches the market and consumer demand weakens, we expect wholesale prices to stabilize, and possibly decrease by the end of summer. 

We expect a large, incremental influx of used inventory to hit the marketplace starting in September and last into the beginning of 2021, coming from prolonged lease return delays and downsizing of rental fleets. In addition, lenders expect a significant increase in delinquencies and repossessions over the upcoming months as the economy continues to feel the effects of high unemployment. With much weaker retail demand, and a projected oversupply of used inventory, we forecast a significant drop in wholesale prices this fall, relative to the heights seen in recent weeks. 

Longer Term View 

Although the economic effects of the pandemic will continue to be felt as far out as three years from now (e.g. according to the recent CBO economic outlook report, the unemployment rate will not return to pre-COVID levels for at least a decade), we still project that wholesale vehicle values will return to the pre-COVID-19 baseline by 2023. Used supply will decline due to cuts in retail and fleet sales throughout 2020 and into 2021.Page Break 

Economic Conditions 

Job Market 

Since the beginning of April, weekly initial unemployment claims remained at record levels. Last week, the Labor Department reported that the US added 1.19 million new jobless claims. Since March, we have seen 20 consecutive weeks of record level layoffs and furloughs. The graph below compares weekly initial unemployment claims from the current recession against the Great Recession of 2007 – 2009. The severity and speed of job losses is unprecedented. The horizontal (x) axis is an offset (in months) from the beginning of the recession, week 0 being the week of March 21st. 

In the early stages of the crisis, the US unemployment rate in April skyrocketed to 14.7%, the highest monthly rate since the Great Depression. The May unemployment level decreased to 13.3% due to the success of the Federal Paycheck Protection Program (PPP) and other stimulus measures enacted in part by the Federal Reserve and Government. As the country and economy continued to reopen during the early part of June, the monthly unemployment numbers eased further to 11.1% and dropped to 10.2% in July. The Labor Bureau also noted in its reports that there was a classification error in its surveys, and the real unemployment numbers were actually higher for each month since March, as illustrated below. 

There is a concern that without further federal stimulus, these gains will be temporary and employment numbers may deteriorate. According to a recently released CBO report, “the unemployment rate is projected to peak at over 14 percent in the third quarter of this year” before declining in the fourth quarter. 

This recession is very different and unprecedented in the labor market – reflecting an almost instantaneous jump in unemployment with projected fast growth within a year. The graph below compares unemployment rates for the last several major recessions. The horizontal (x) axis is an offset (in months) from the beginning of the recession. 

Although we have seen a reduction in unemployment, the initial economic shock and job losses have created a deep hole for us to dig ourselves out of. Between February and the end of July, the nation lost close to 12.9 million jobs. 

Consumer Confidence 

With a weakening of the economy and the increase of new COVID-19 cases across the South (which is now expanding to other hot spots across the country), consumer confidence dropped back to the lows of April. The University of Michigan’s Monthly Consumer Sentiment Index for July, released at the end of July, decreased to 72.5 points. The report also predicts a further weakening in consumer confidence: “unfortunately, declines are more likely in the months ahead as the coronavirus spreads and causes continued economic harm, social disruptions, and permanent scarring.”  

Not surprisingly, consumer confidence has been on a bit of a rollercoaster the last five months. At the beginning of the year it was strong – the University of Michigan’s Monthly Consumer Sentiment Index in February was 101 points. As the COVID-19 pandemic spread across US, the index dropped to 71.8 points in April and increased slightly to 72.3 points in May. During recent testimony by Federal Reserve Chair Jerome Powell, he noted that during the months of April and May, “stimulus checks and unemployment benefits are supporting household incomes and spending.” With these one-time stimulus payments and extended unemployment benefits helping the economy, the index for June increased further to 78.1. The gains, however, were not uniform across the country. With a significant reduction in the number of COVID-19 cases, the Northeast region led the way with a record 19.1 point month-over-month jump, while the Southern region rose just 0.5 points due to the dangerous increase in numbers of new infections and fear of further shutdowns.  

Gross Domestic Product (GDP) 

The Bureau of Economic Analysis published an advanced estimate on GDP in the second quarter – real GDP decreased at an annual rate of 32.9%. This was the highest drop in GDP ever recorded.  

Consensus states that the economy will start to grow in the third quarter compared to the previous one. Current “nowcast” from GDP Now model [from the Federal Reserve] estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 was 20.5% on August 7th.  

Delinquencies in Automotive Lending 

The number of accounts in ‘hardship’ jumped substantially in April and kept increasing through June across all risk groups, according to the Monthly Industry Snapshot by TransUnion. Currently, more than 7% of all accounts are in hardship – this is almost a 1,700% increase over last year. The increases are across all risk tiers. As deferrals expire in the upcoming month, coupled with a high unemployment rate, lenders expect a large portion of these ‘hardships’ to become delinquencies.  

According to the “Senior Loan Officer Opinion Survey on Bank Lending Practices” from the Federal Reserve, lenders started to tighten standards on auto loans in the first half of 2020. Recently released results from the second quarter showed a substantial increase in the number of banks that tightened their standards.  

Gas Prices 

Gasoline prices reversed the May trend and then started to increase. Since their lowest point at the end of April, prices are up $0.40, to $2.18 per gallon last week, and holding steady for the last several weeks, according to the U.S. Energy Information Administration.  

Current Wholesale Market Overview 

Auction Insights 

  • Carmax, Carvana, and the other larger buyers continue to show their dominance in the lanes, as well as online, as the increase in pricing related to winning bids is forcing smaller buyers to step back from bidding for fear of getting stuck with high priced inventory.  
  • Sale rates in-lane and online have been stable over the last few weeks, as buyers are eager to scoop up the limited available inventory and sellers are making use of the high demand by increasing floors week after week.  
  • Auction volume is showing some regionality in trends, with volume increasing, particularly of rental units, in portions of the country that have been harder hit by spikes in COVID-19 cases.  
  • Auction Operations: 
    • At the beginning of August, Manheim announced the extension of its Simulcast Success Fee waiver throughout the month of August.  
    • KAR Gobal, parent to ADESA, released its Q2 earnings, a $32.3 million net loss for the quarter. The quarter started during a time when all auctions were dealing with the onset of the pandemic, but by the end of the quarter digital block sales and other digital formats at the auctions gained favor by dealers as sales rates increased and vehicle prices skyrocketed.  

Auction Volume 

Despite most auctions continuing to operate under an all-digital platform, sales volume has rebounded to a level consistent with, and on some days higher than, this time last year. This is being driven by strong retail sales, consumer demand, and the need to backfill, leading dealers to use auctions as their main source of inventory. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales (and some closed entirely) at the end of March. The graph below illustrates the estimated year-over-year change in sales volume of the wholesale market. The red line is the base line, and any dots above the line indicate higher amounts of sales vs.  the prior year.  

Sales Rate 

At the onset of the pandemic, as shelter-in-place orders went into effect, sales rates quickly tumbled into the teens, but rates have been climbing each week and have now stabilized. Independents that have been operating a traditional physical sale continue to report the highest sale rates, many consistently exceeding 70% week after week. Black Book’s estimate of the overall Weekly Average Sales rate is presented below.  

Current Wholesale Price Trends 

Current Market Level View 

Volume-weighted, overall car segment values increased 1.03% this past week. This increase is slightly above last week’s 0.96% increase, but still a lower level than we saw throughout most of July, when increases regularly exceeded 1.5%. The smallest increase this past week was the fuel-efficient Sub-Compact Car segment at 0.42%. In sharp contrast, the largest increase was the expensive Premium Sporty Car segment at 1.33%. When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 1.10% last week. The only segment not experiencing a large gain was the Full-Size Van segment. This is a segment that has continued to track along as if we are in a “normal” market with only small up and down price changes.  

Year-Over-Year View on Wholesale Prices 

The graph above compares Black Book’s Seasonally Adjusted Retention Index for the 2019 and 2020 calendar years. The Black Book Used Vehicle Retention Index is calculated using Black Book’s published Wholesale Average value on two- to six-year-old used vehicles, as a percent of original typically-equipped MSRP. It is weighted based on registration volume and adjusted for seasonality, vehicle age, mileage, and condition. The Index offers an accurate, representative, and unbiased view of the strength of used vehicle market values. It measures an ‘apples-to-apples’ year-over-year retention comparison. 

2020 started slightly below 2019 levels, but the market showed early strength in February and March. As the US economy shut down due to the COVID-19 pandemic, we measured the highest single month drop in April of 6.9 points since launching the Index. As we entered July, wholesale prices continued the rebound that began during the second half of May and continued through the month of June, with June’s Retention Index climbing back to pre-COVID-19 levels, with a record jump of 9.1 points. Recently released, July’s Index value jumped above 2019 to 126.0 points as wholesale prices continue their climb. During the last recession (2007-2009), the Index declined by about 15 points in a span of 12 months before recovery started. We project that the Index will decline over the next five months after the summer’s jump. 

Segment Highlight – Compact Luxury Crossovers 

Segment Overview 

The Compact Luxury Crossover (LCU) segment is a very small segment, roughly 3% of the total market, and it is a logical strategy for manufacturers to look to expand their offerings in this segment. This can be seen in the growth of the non-luxury Compact Crossover segment which has expanded  from only 12% market share 10 years ago to 20% today.  

Popular models in this segment include Acura RDX, Audi Q5, BMW X3, Lexus NX, and Mercedes-Benz GLC. With the growth seen in the non-luxury Compact Crossover segment, it is a natural choice for luxury manufacturers to look to expand their offerings from only ICE vehicles into BEVs. This segment contains the wildly popular Tesla Model Y, Jaguar I-Pace, and Audi e-Tron, and is soon looking to add the Mercedes-Benz EQC fully electric crossover to the segment.  

Historical Trends 

Black Book’s Seasonally Adjusted Retention Index for the Compact Luxury Crossover segment has reacted much like all the other segments throughout COVID-19. There was a drop in the Index in April and a quick rebound May through July which has resulted in an Index reading higher than the pre-COVID level 

Recent Depreciation Rates  

The Compact Luxury Crossover values followed the overall trend of the market at the onset of the pandemic.  Initially, we saw the stay-at-home order and dealership closures put extreme downward pressure on the market. However, much like all the other segments, the rebound was sharp, and the segment has seen consistent gains, with week-over-week increases for the last ten weeks. 

Model Spotlight – All-New 2021 Mercedes-Benz EQC 

Mercedes-Benz is keeping up with the trend with the introduction of its EQ line-up, the first of the releases will be the EQC, falling into the Compact Luxury Crossover segment. The AWD drivetrain will deliver 402-hp and 561 lb-ft of torque, capable of a 0-60 in 4.8 seconds. It will come standard with a DC Fast Charging system that will allow the vehicle to be charged from 10% to 80% in as little as 40-minutes.  As for safety features, it will have available assistance systems such as  blind spot assistance and lane keeping assistance. Starting MSRP has yet to be released, but range is expected to be 279 miles.   

Source: Mercedes-Benz USA (mbusa.com) 

Used Wholesale Price Projections 

Wholesale Price Impact Under the Most-Likely Economic Scenario 

Wholesale prices dropped significantly in April as uncertainty over COVID-19’s impact and response dampened vehicle demand, resulting in an overall wholesale price decline of 5.9%. We saw a substantial improvement in prices during the last two weeks of May, and the monthly decrease was limited to only -1.5%. In June, wholesale prices continued to increase, and the overall market appreciated by a record 5.7%. As a comparison, last year’s prices declined by 0.9% over the same period. Wholesale prices increased by a record 7.0% in July.  

Short-Term Outlook (Fall of 2020) 

Black Book’s August Published Residual Values (dashed lines) reflect a new economic reality. Once the temporary strengthening during the summer months passes, we project values to stay below our pre-COVID-19 forecast over the next two years, with the deepest declines expected over the next five months. The green line represents our most-likely economic scenario, which does not include a possible second wave of COVID-19, as well as a still undefined second stimulus package. A more severe and prolonged recessionary scenario is shown in red. Projections are indexed to the pre-COVID-19 projections (black line). All values are weighted by the used vehicle sales volume (actual, where available, or projected). 

We project a drop in wholesale prices compared to a pre-COVID-19 baseline this fall, as the US economy suffers through the effects of COVID-19. We anticipate that, later this fall, wholesale prices will be approximately 5% to 10% lower than originally projected before the pandemic, due to a glut in supply and much weaker demand. Prices will start to recover in 2021 as the economy becomes stronger. We also anticipate that older (>6-year-old), cheaper vehicles in average condition will not decline as much due to increased demand for these units. Additionally, we project that newer (zero- to one-year old) models in good condition will retain their strength in the near future due to continuous shortage of new inventory.  

Long-Term Projections (36-Month Residual Values, Fall of 2023) 

The effects of the pandemic will continue to be felt out to 36 months from now. We project that values will return to the pre-COVID-19 baseline as used supply will decline due to cuts in retail and fleet sales throughout the remainder of 2020 and into 2021. 

Wholesale Price Impact Under a Severe Recession Scenario  

In this scenario, we project a decrease in wholesale prices of up to 15% in early 2021, compared to a pre-COVID-19 baseline, with a slow recovery in the second half of the year. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023. 

Used Retail Vertical  

Used Retail Prices 

With the proliferation of ‘no-haggle pricing’ for used-vehicle retailing, asking prices accurately measure trends in the retail space. From the peak in early April until the end of June, retail listing prices decreased by about 4%. Since the second week of June, we saw a stabilization of used retail prices fueled by higher consumer demand due to stimulus payments, the federal Paycheck Protection Program (PPP), and limited used and new inventory. In the last two weeks, used retail prices rebounded to above pre-COVID-19 levels. We expect used retail prices to decline later in the fall as stimulus payments are exhausted and the protection in PPP expire. 

Used Retail Inventory 

Many dealers continue to report a shortage of used inventory in the wholesale marketplace. As a result, from the peak in February, we’ve seen a decline in the number of used retail listings by about 25%. The true shortage of vehicles is probably not as severe as this decline would lead you to believe, as many dealers sell some of their best inventory in the first several days before listing them online. Nevertheless, the shortage of used inventory helps keep retail prices elevated even in the weak economic conditions.  

The graph above shows the weekly average of the number of retail listings collected by Black Book, indexed to the first week of the year. We see a continuous decline in the numbers starting at the beginning of May as the economy started to open in the states outside of the Northeast. 

We started 2020 with active retail listings above the previous year’s levels. By July, the listing volume dropped to about 8% below 2019 numbers. Currently, the number of listings is about 10% lower compared to last year. Scarcity of used inventory is the main reason for this shortage of retail vehicles for sale. Another important factor that may cause the numbers of listings to decrease is that some of the inventory is sold before it has a chance to be listed online. 

New and Used Retail Insights 

  • New Vehicle Sales 
  • New car deliveries are finally increasing for dealers, especially on vehicles that are produced in the US that benefit from a shorter window of time between start of production to delivery. This hasn’t stopped many of these deliveries from being pre-sold prior to delivery, leaving dealers still struggling to have inventory on the lot.  
  • Not all manufacturers are still reporting their sales numbers monthly, but the ones that have released July numbers are a mixed bag of results. Toyota reported a quarterly profit after sales rebounded following the drop experienced at the start of the pandemic. Unfortunately for Honda, the result was not as positive, with the overall result showing a loss, but it expects to finish out the year with a profitable result. 
  • Quality trade-ins have become more important than ever as a source of inventory, and dealers are finding themselves having to increase value they are paying for the trades. 
  • Used inventory levels also remain low, with days’ supply hovering around the 30-day mark. It is common for us to get reports from dealers that are at a 50% deficit of their typical used inventory levels.  
  • COVID-19 related manufacturing delays continue to cause slowdowns for new inventory production.  
  • Honda repositioned office workers to the assembly line to keep plants operating in an attempt to meet consumer demand for their vehicles. Production worker absenteeism, due to COVID-19, is causing a shortage of employees that are able to keep the plant operating, and the substantial unemployment benefits has made it difficult for them to source temporary employees, which led them to look to their office workers to fill in.  
  • A few weeks ago, General Motors announced the closure of the third shift of its Wentzville, Mo. plant due to absenteeism due to COVID-19 as the lack of workers prevented them from being able to keep the plant operating. However, demand for the Mid-Size Pickups that are built at this plant has forced them to re-evaluate the decision, and they will be bringing in laid-off employees from other states to keep all three shifts running.  
  • The effects of the shutdowns a couple of months ago continue to ripple through the automotive industry. The all-new Genesis GV80 and redesigned Genesis G80 are going to be delayed until fall due to delays in obtaining the vehicles’ emissions certification.  
  • Another much anticipated vehicle launch fell victim to COVID-19. This time it’s the new Land Rover Defender 90 due to supply chain disruptions. It will no longer be launched this year as a model year 2020, but instead it will be available early next year as a 2021.    

Used Retail vs. Wholesale Prices Trends 

Each week, members of the Black Book automotive analyst team, data science team and executive leadership team speak with no less than 30 dealers, along with buyer and seller representatives, wholesalers and others, who represent hundreds of franchise and independent dealers nationwide. These industry experts, along with experts we speak with from leading fleet management and rental car companies, auction leadership, and other industry experts, help to clarify and connect the dots between the wholesale and retail markets, adding to the insights that our data reveals.  

Since the start of the pandemic, we have been observing different trends in both wholesale and retail prices (see graph below). In April and May, wholesale prices declined at a higher rate compared to retail prices. As margins grew, dealers reported healthy profits on a per vehicle basis. Retail prices displayed stickiness on the way down. Similarly, as wholesale prices came roaring back to pre-COVID-19 levels, retail prices are slow to recover, exhibiting the same stickiness on the way up. As wholesale to retail margins shrink, it is even more important for dealers to stay up to date on market movements. We are seeing this trend play out on dealership lots, where retail asking prices are not increasing at the same level as wholesale transaction prices. This means dealers are paying more at auctions and through wholesale channels, but those increased wholesale acquisition prices, as a percentage, are not flowing through to the retail lots and online listings, and ultimately to the consumer. The main driver of the slow increase in retail prices, based on our conversations with dealers, is simply the fear of sitting on inventory for too long, coupled with the added risk that the market makes a quick reversal, which leaves them stuck with a vehicle they paid too much for. Dealer sentiment is quite clear—if they are going to pay up for a vehicle in this environment, they are choosing to turn them quickly, even with less margin than normal, to ensure they are not caught with high priced inventory when the market does shift. There is no long game here. There is simply a need to fulfill demand in a risk filled environment. 

The graph below shows this retail / wholesale dynamic since the start of the year. Prices are indexed to the first week. The black line is Black Book’s Retention Index (not adjusted for seasonality). It is calculated using Black Book’s published Wholesale Average value on two- to six-year-old used vehicles, as a percent of original typically-equipped MSRP. It is weighted based on registration volume and adjusted for vehicle age, mileage, and condition. The blue line is a retail index – average listing price of available retail inventory adjusted for mileage. 

CPO Retail Sales 

Certified Pre-Owned has grown in popularity as it provides consumers with an affordable used purchase option with low mileage (a typical 3-year-old CPO vehicle will have around 5,000 less miles than a similar non-CPO vehicle), but with the peace of mind that comes with a new purchase with the additional warranty. Some OEMs also offer special financing rates and terms for their CPO vehicles. For dealers, the cost to certify a vehicle is typically minimal and the return on the retail is typically greater. CPO vehicles are typically viewed as nicer condition units as there are minimum criteria a vehicle must meet to be able to be certified, and these typically involve age and mileage restrictions. 

There are additional benefits to consumers that purchase through certain OEMs, including GM, who offers an exchange program on their Chevrolet and GMC CPO units. If the customer changes their mind within three days or 150 miles, the purchaser can exchange it for any Buick, Chevrolet, or GMC CPO vehicle. Nissan is improving their CPO program by adding additional benefits such as $750 Captive Cash on all CPO Rogue and Rogue Sports and adding one-year complimentary pre-paid maintenance when a CPO vehicle is financed through NMAC. 

For some dealers, there is additional incentive to CPO a certain percentage of their used inventory as it bumps up their status with the manufacturer. For example, BMW takes into consideration a dealer’s CPO sales volume when deciding on the dealership’s new car allocation.  

Cost of certifying a vehicle ranges by manufacturer. Typically, for mainstream OEMs, the cost to the dealer is $500 or less per vehicle, but luxury vehicles can reach into the thousands of dollars and vary by model. In most cases, the full cost to CPO certify a vehicle is the responsibility of the dealer, including any reconditioning that is necessary for it to receive certification. 

Retail prices of CPO vehicles are generally about 3.5% higher than a similar non-CPO vehicle (adjusted for mileage). But similar to the cost to CPO a vehicle, the difference varies among the segments and, for example, can climb to about 7% for near luxury sedans. 

New Vehicles Sales Outlook 

Our New Sales Outlook remains unchanged from last week. We anticipate a significant reduction in US new vehicle sales in 2020 (both retail and fleet sales) due to continued reduction in consumer demand. This is the result of several ongoing factors, including less miles driven due to remote work and shelter-in-place initiatives, high unemployment, and an overall feeling of uncertainty by consumers. Overall, new sales were down 22% during the first seven months of the year compared to last year (with a 12% YOY decline in July). Even as OEMs are restarting assembly lines, there are significant challenges ahead in order to return to a normalized production schedule as we reported in previous updates. The graph below shows our current projections for new vehicles sales for the remainder of 2020.  

Due to continuous production disruption and much weaker demand due to economic slow-down, we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 12.7mm units in our base economic scenario. In a deep economic recession scenario, we project a 40% drop in new sales in 2020 to 10.2mm units as economy dips into a prolonged recession. 

 BEV Sales Outlook 

As fast charging infrastructure continues to expand, we expect a slow growth in battery electric vehicles (BEV) market in the next 2-4 years. Stronger growth is projected after 2025, but we do not expect a large shift to BEV vehicles in the US market in the next 10 years, with market share only exceeding 5% by the decade end. Our current view is that growth in BEV demand will be evolutionary and not revolutionary. 

Without substantial change in government policies (state and federal levels), we do not project a wide adoption of BEVs outside several states like California. As federal incentives decline, several states (especially CA) will increase rebates for lower priced BEVs to accelerate adoption of BEV vehicles. BEV prices are still projected to be substentially higher than comparable internal combustion engines (ICE) for the next 3-4 years. 

Projections below include only light duty on-road vehicles as defined by Federal Highway Administration. 

All the recent growth in the BEV market came from Tesla: more than ¾ of all recent sales are Tesla models. There will be many new non-luxury (e.g. Ford, Nissan, and Volkswagen) and luxury (e.g. Mercedes-Benz and Infiniti) entrants into the market for 2021/22 model years. 

Used Vehicle Supply Projections 

Black Book projects a higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors: 

  • Delayed lease returns resulting from lease extensions offered by OEMs – more than 560,000 additional three-year-old units in the second half of 2020 
  • Extensive de-fleeting by rental car companies due to lack of consumer and business traveler demand and financial pressure to raise cash – at least 250,000 one- to two-year-old vehicles will be added to the market in the second part of 2020 
  • Dramatic reduction in auction activities due to COVID-19 in March, April, and May 
  • Increased repossessions due to deteriorating economic conditions in addition to delayed repossessions in April / May – we expect the volume of repossessed vehicles to at least double in the next 6 months compared to last year

Short Term Lease Return Projections 

When we started the year, lease returns were projected to hit a record volume of above 4.1 million units. Once the pandemic was underway and most manufacturing stopped, OEMs started to encourage lease extensions in order to push returns further into 2020, when they would be able to provide replacement vehicles. As a result, we project at least 560,000 additional units in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in April / May, along with expected turn-ins of the lease extensions. 

Rental Unit Returns 

Business and leisure travel collapsed at the end of March – air travel is still down by more than 70% according to the TSA. We expect a significant reduction in both categories for the remainder of 2020. In addition, there is no expectation that travel will return to pre-COVID-19 levels over the next several years. According to the IATA (International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023. This puts tremendous financial pressure on rental companies that rely on air travel to reduce both their current fleet and scrutinize future vehicle acquisitions.  

At the end of May, Hertz filed for bankruptcy in North America as a result of the pandemic. Last week, Hertz was able to secure a deal with its lenders that allows a gradual reduction of fleet – over 182,000 units between June and December (it was estimated that between 20,000 and 30,000 of these units were already sold). In addition to Hertz, we expect other rental companies will continue to reduce their fleet during the fall months to match lower demand for rentals. This practice will lead to over 250,000 additional rental units hitting the wholesale market in the second half of 2020.  

The graph below shows Black Book’s projections for rental returns. The purple line shows the difference between current (darker rectangles) and pre-COVID-19 projections (lighter rectangles).  

In the longer term (later 2021 – 2023), the drop in rental return volume will benefit the price of newer used units, as supply will be limited. 

Longer Term Used Returns Projections 

With the reduction in retail and fleet sales over the next several years, we project approximately 75k used units per month less in the market in 2023, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations. 

Originally posted on F&I and Showroom

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