By Ray Birch
RIVERSIDE, Conn.—Credit unions should be prepared for certain auto dealers to begin pushing more sales of high-quality late-model used cars this year, a market in which one expert thinks CUs can expand.
“The franchise dealers, those who sell the brand of an automaker, are focusing on selling more used cars because when inventory management is effective, used cars’ profits per unit can exceed those of new cars in the same store,” said Maryann Keller, principal at Maryann Keller & Associates and a former Wall Street auto industry analyst.
Today, franchise dealers need to sell more used cars if they are to make their profit targets, since new car front-end profits are totally controlled by the automaker through volume-based bonuses and tight spreads between wholesale and retail prices, explained Keller.
“Aiding the increase in market share of used cars by franchise dealers is the fact that thousands of independent dealers went out of business in the recession and never reopened. Plus, the abundance of late model off-lease units coming back are a natural fit with the franchise dealer business,” she said. “So, credit unions should seek out deeper relationships with these operators who will account for a greater share of the sales of late model used cars in 2018 and beyond . . . It is hard for CUs to gain share of new cars, because of the heavy subvention by the automakers. But in used cars they have plenty of room to grow.”
Floorplan Costs Rising
Keller added that rising interest rates will push up the cost of floorplan lines for new and used vehicles, so dealers will have to be more careful in stocking the right vehicles, especially on their used car lots where the underlying value of the collateral depreciates with time.
“Auto demand is dependent on credit, and with rates rising it could impact both how much shoppers can spend and what they buy,” noted Keller. “In terms of new cars, automakers will probably emphasize long-term loans at subvented rates over leases in their marketing efforts.”
As other analysts have recently told CUToday.info, leasing is not expected to be as strong in 2018 as it has been in recent years.
“Automakers will continue to offer leases, but, frankly, they know they over-did leases and are facing a tidal wave of cars coming off lease on which they will likely lose money,” she said. “You can see in their advertising that they are offering low interest rates along with cash more often than in the past one new cars.”
Maryann Keller
Keller said that automakers keenly understand expenses regarding new cars and their financing, and can include those in their marketing budgets.
“But leases have an unknown residual value at lease termination, and we can see that with used car depreciation accelerating that even a little combination of a small increase in the average per-vehicle loss plus the record number of cars coming off lease can have a big impact on financial performance,” Keller said.
Off-Lease Volume
Keller acknowledged that the large off-lease volume has depressed used car prices.
“So far demand for off-lease units has been good so prices, though down, are not too far from what was expected,” she said. “However, if used car demand slows because of higher rates or concern about the economy, while all these four-million off-lease units come back, then used car values will drop much faster.”
Keller said that the days of the 2% auto loan are likely coming to an end due to recent and expected Federal Reserve rate hikes, which will affect consumers’ ability to buy new cars.
“As auto lenders see the yields tighten on asset-backed securities, car loan rates have to rise, as they have already,” she said. “We’ve gotten used to seeing car loan rates of 2% or so, but we should view that as an anomaly now.”
Keller is another who predicts auto sales will decline slightly in 2018.
“Although the economy is humming, the unemployment rate is low and consumers are spending, the outlook for auto sales, in my opinion is flat to down slightly,” she said. “Last year 17.2 million vehicles were sold and this year the number will be somewhere between 16.8 million and 17.2 million, all in all another good year. The outlook for used car demand is similarly good because of small improvements in wages and lower taxes. The only caveat that I would offer is the prospect of inflation and higher interest rates, which took more than 700 points off the Dow in two days.”
Banks Pulling Back
As auto sales have been declining and banks have been pulling back, largely in the subprime space, credit unions have been steadily picking up market share. Credit unions’ market share increased from 23% to 26% in Q3 of 2017, according to CU Direct.
“Many lenders cut back or pulled out of subprime loans last year and I expect that they will remain on the cautious side this year,” said Keller. “Credit unions are not only gaining market share, they are also performing at least as well with respect to defaults and accounts 30- and 60-days past due. I suspect that is because most credit unions have relationships with the members who might do other business with the CU, and members often have credit union affiliations through work. So the risk, on average, might be lower.”