Used cars should get cheaper in 2014 after five years of consistently rising prices, in part because more vehicles are coming off lease this year, NADA economists say.
Analysts at NADA Used Car Guide say this is not a sign of a bursting bubble. But a report from a used-vehicle auction company warns that the industry must hone its remarketing processes because the number of off-lease vehicles will continue to climb sharply.
The average price of a used car rose 18 percent from 2007 to 2013 as cash-strapped consumers bought used cars rather than new ones, says NADA Used Car Guide. Prices also were supported by the federal Cash for Clunkers program, which slashed the supply of old cars.
Used-car prices are now roughly 10 percent higher than the average price of the past couple of decades, NADA analysts said.
Some analysts have examined that trend and predicted a "correction" -- a collapse in used-car prices, bringing them closer to the historical average. ALG, the residual values specialist, predicted in late 2012 that used-car prices would fall 8 to 10 percent over the next few years.
"When you look at [the graph], it's frightening," says Jonathan Banks, executive automotive analyst for NADA Used Car Guide. But he insists the reality is not that scary.
Banks predicted that the price of used cars up to 8 years old will fall 0.5 to 1 percent in 2014, with the drop driven by a wave of off-lease cars that were leased a few years ago as the recession ended and financing became more available. But he said the market remains in a solid position.
"We've seen prices improve based on fundamentals -- not based on psychological changes in demand like we saw with the housing bubble or the Internet bubble," Banks said. He said the elevated price of used cars is a "new normal." Used-car supply remains depressed by the collapse in new-car sales in 2008-09.
At the same time, demand is high because of a growing economy, falling unemployment and readily available credit.
NADA predicts 16.4 million new cars and light trucks will be sold or leased in the United States this year, up 6 percent. Banks predicted the used-car market would tick slightly upward, with roughly 42 million units sold nationwide.
Meanwhile, an annual report on the used-car industry noted that in 2013, new vehicles retailed through leases nearly tripled from 2009, to 3.2 million, making it imperative that the industry hone remarketing processes to handle the increased off-lease vehicle volume expected over the next couple of years.
The 2014 Manheim Used Car Report also warns that dealers who accept off-lease vehicles on behalf of lessors -- so-called grounding dealers -- "will not be willing or able to acquire the same large share of off-lease units that they have in recent years."
The report was released by Manheim, a used-vehicle auction company, at the NADA convention.
Unlike in 2002, when high volumes of off-lease vehicles returned to the market and dragged down residual values, off-lease vehicles this year will enter a more favorable market in which used-vehicle prices are still relatively high and "residual adjustments" likely will be modest, the report says.
Additionally, in 2002 the certified-used market was less than 40 percent the size of total off-lease volume. "In 2013, the CPO market was 23 percent bigger than total off-lease volume," the report says. The implication: today's CPO market can absorb a much larger portion of off-lease vehicles.
All possible buyers
Still, this year and, more importantly, into 2015 and 2016, lessors need to improve remarketing processes and make sure off-lease units are exposed to all potential buyers, the report adds.
New-vehicle sales to rental companies increased 1 percent to almost 1.6 million units in 2013, the report says, citing rental unit sales data from Bobit Business Media. It was the highest volume since 2007 but well below the 2.1 million units that were sold to rental fleets in 2005 and 2006.
The Detroit 3 accounted for almost 65 percent of the new vehicles sold to rental fleets in 2013. They decreased their share for the third straight year, the report says.
At the same time, Hyundai's sales into rental rose 73 percent to 118,000 units, accounting for the biggest percentage increase among automakers last year.