By Ray Birch
LAWRENCEVILLE, Ga.—Lenders should brace for the sharpest declines in used values over the next five months, according to a Black Book forecast that also sees a doubling of repossessions and a resulting big hit to depreciation.
Calling 2020 a “rollercoaster ride” for used values, Laura Wehunt, vice president of automotive valuation at Black Book, said September signals marked declines are ahead.
“September started off with stability in valuations and signaled the first signs of softening,” she said. “New inventory deliveries to retailers have been increasing in frequency and quantity. This has resulted in a softening of demand for the newer used units that gained so much strength as viable substitutes for the lack of new inventory—due to extended COVID-19 related production shutdowns and supply chain disruptions.”
Wehunt said consumer demand has also slowed, as the increased interest from the summer months loses gas.
“As a result, dealers are finding themselves needing less inventory to stock their lots,” Wehunt said. “Black Book projects values to stay below the pre-COVID-19 forecast over the next 12 months, with the deepest declines expected to occur over the next five months.”
Around the Curve
Wehunt said used prices are projected to decline before an economic recovery begins in 2021 due to the continuing pandemic and a projected glut in supply of used vehicles resulting from repossessions, delayed lease returns and rental companies “de-fleeting.”
“However, the anticipation is that older—greater than six years old—cheaper vehicles in average condition will not decline as much due to increased demand for these units,” she said. “Demand for this portion of the market typically increases during economic downturns, as it meets consumers’ needs for reliable transportation, without a large financial commitment.”
Wehunt said Black Book projects the effects of the pandemic will continue to be felt out 36 months from now when wholesale values are projected to return to pre-COVID-19 levels.
“Many of the payment deferrals that were offered to consumers at the onset of the pandemic have now expired,” noted Wehunt. “These accounts were put into a hardship status, but not delinquency. The true impact that increased numbers of repossessions will have on the used market supply for the remainder of the year is still unknown.”
A Big, Potential Negative
Wehunt said repossessions have the potential to be a large source of supply that could negatively impact values.
“As a result, this could open lenders to additional risk if they find a large portion of their portfolio in delinquency later this year, or into early 2021, before values begin to rebound,” she said.
Wehunt, reminded repossessions have been stalled due to forbearances, and that about 1.9 million vehicles were repossessed by lenders and sold in 2019, largely through wholesale channels.
Wehunt pointed out that according to the American Financial Services Association, as of early September only Maryland and Washington, D.C., still had a moratorium in place on repossessions.
“With the ending of deferrals beginning during the summer months, most lenders began at the end of August sending out 30- and 60-day notices,” she said. “Our survey of lenders and automotive recovery companies suggest that the volume of repossessed vehicles will at least double in the next six months. We expect that there will be substantial challenges at every step of the process as recovery, transportation, and disposal services are not fully recovered.”
The Next Challenge
As CUToday.info has reported, managing a large number of repossessions may become challenging for credit unions this year and next.
While big declines is used values are ahead, they won’t fall as sharply as predicted earlier this year, when Black Book was projecting annual values to decline by almost 30% by the close of 2020.
According to Wehunt, the forecast change and the 15% increase in prices were the result of a shortage of supply and demand driven by federal stimulus payments.
“After a hot summer, we expect the yearly depreciation to be around 10%,” she said.
Looking back, Wehunt noted the wholesale market started the year strong from January through March, as prices increased during the first quarter, before stay-at-home orders went into effect.
Laura Wehunt
“Wholesale prices dropped significantly in April, as uncertainty over COVID-19’s impact and the response to it dampened vehicle demand.”
Wehunt said this resulted in an overall wholesale price decline of 5.9% and wholesale auction conversion rates also declining.
‘Substantial Improvement’
During the last two weeks of May, the market experienced a substantial improvement in prices as many states reopened their economies, she noted.
“This rebound at the end of May mitigated the overall value loss to only -1.5% for the month. During June and July, demand in the automotive market was fueled by federal government stimulus payments and a delayed tax season,” she said.
Additionally, used and new inventory shortages pushed wholesale prices up. In June, wholesale prices appreciated by 5.7%, as compared to 2019 when the overall market declined 0.9% during the same period.
“The trend continued in July, with a record-setting 7% increase. At the end of July, the majority of the government benefits expired, but wholesale prices continued their ascent in August for another 2.7% gain,” Wehunt said.