By Ray Birch
LAWRENCEVILLE, Ga.—It was a “banner year” for used vehicle values in 2018, but 2019 won’t treat the pre-owned market quite as well, according to Black Book.
While in 2019 used values will be affected by a significant number of off-lease vehicles coming back to market, overall, depreciation should remain fairly stable and used demand “healthy,” the company said.
Anil Goyal, executive vice president, operations at Black Book, emphasized that 2018 was a very strong year for used values.
“In 2018, we are seeing annual depreciation rate trend at 12%, while historically we have seen in the past five years a range from 12%-18%,” he said. “In 2019, our forecast is 15%, which is about the average depreciation in recent years.”
Black Book is projecting off-lease returns will be higher in 2019—300,000 more—totaling 4.2 million.
Tilting Toward Used
“Overall demand is all driven by the economy, which is expected to be strong, but maybe not as strong as in years past,” said Goyal. “Our residual models assume a GDP growth of 2.2% for base case, and lenders say that they are likely to tighten criteria next year. Interest rates will be higher, which tilts the demand more in favor of the used market, particularly off-lease vehicles.”
While 2018 represented a year of relatively flat sales of new cars and trucks, quite the opposite was true for used vehicles, Goyal said.
As CUToday.info reported, for most of the year, especially during the summer months, used vehicles maintained much of their prices and values compared to the last few years. Values for a number of used vehicles even increased, which CUToday.info also reported.
“Typically, summer is when most used cars and trucks begin to see prices drop, and this depreciation accelerates throughout the remainder of the year,” said Goyal. “However, in 2018, we saw a strong spring season after the replacement demand stemming from the 2017 hurricanes, which absorbed much of the excess used vehicle inventory. And throughout the year, buyers were enamored with the lightly used off-lease offerings, which kept retention values somewhat strong until late summer.”
The Year of the Compact
With a great deal of the automotive industry focused on the appeal trucks and SUVs, 2018 was the year of the compact and mid-size sedan, said Goyal.
“These segments have been beaten down in value over the past few years. This year, mainstream sedan segments saw a bounce up from the lows in the used market,” said Goyal. “On the other hand, consumer interest continued to subside in sedan segments in new sales. Affordability combined with marketing of used vehicles shifted the demand from new vehicles to used vehicles.”
Segments such as luxury cars, sub-compact luxury CUVs, and near-luxury cars saw depreciation on the higher end of the spectrum this year, said Goyal.
“These segments have high competition and slightly faltering buyer demand,” he said. “Mid-size cars depreciated at a 10% rate in the last 12 months, whereas luxury cars had 19% depreciation. That’s a nine-percentage-point gap.”
Healthy Resale Market Ahead
Anil Goyal, Black Book
Goyal said Black Book is forecasting a healthy resale market.
“As prices on new vehicles inch higher, as well as rising interest rates adding pricing pressure to new vehicle stickers, we believe demand for used vehicles will remain healthy for the foreseeable future,” said Goyal. “According to the Black Book Used Vehicle Retention Index, we saw the Index increase in value for most months throughout 2018 due to the strong used market in 2018.”
Looking back, Goyal said 2018 started off well with excess used inventory absorbed by the hurricanes late in 2017.
“After the tax cuts, the economy experienced unprecedented growth, with GDP in Q2 rising 4.2%, and in Q3 by 3.5%—as well as more jobs added this year than in the previous two,” he said. “Losses declined and as a result credit availability has been strong with low interest rates. The carmakers have remained disciplined overall in incentive rates, currently hovering around 11%.”
A Key Point
Goyal focused on a key point that drove greater consumer interest in used cars in 2018, and will likely do the same in 2019.
“With limited growth in real income, affordability remained front and center driving demand higher for used cars,” he said. “At the same time, franchise dealers really embraced marketing and selling of used cars, with some creating separately branded rooftops to capitalize on higher margins associated with selling used vehicles. This has improved awareness of used vehicles overall, particularly off-lease, and has been an important contributor in keeping used values high. While margins for new vehicles have continued to decline this year, margins for used vehicles have improved. The stars were aligned perfectly to make 2018 a banner year for used.”