Pent-up demand, move over.
New-vehicle sales increases are being supported by consumers returning to the market as their vehicle leases expire, not just pent-up demand from the recession years, Tom Webb, chief economist at Manheim, the nation’s largest auto auction company, said Monday.
Webb said the increase in off-lease vehicle returns this year will approximate the total increase in new-vehicle sales. Next year, he forecast, the increase in off-lease vehicles will likely exceed the total increase in new-vehicle sales.
He predicted that off-lease vehicle volume will hit 2.1 million this year, up from 1.7 million in 2013 and will grow to 2.5 million in 2015 and top 3 million in 2016.
A new-vehicle market supported by off-lease returns is a good thing, he said.
Lease, not loan
“If you consider that new vehicles are increasingly being bought by high-income households that do, in fact, want to trade on a regular cycle, then they should be in a lease, not a retail contract,” Webb said Monday during the company’s quarterly conference call.
“Because the residual risk always has to reside somewhere, where better for that risk to reside than with the lessor who has a portfolio of vehicles and hopefully also has a professional remarketing arm,” he added.
Webb said new-vehicle sales in the first quarter of this year were basically flat because of “a poor January and February” but the retail lease rate for the quarter grew by 10 percent.
Manheim’s monthly Used Vehicle Value Index, also released Monday, rose in March to 124.4 -- the highest since May 2012. Last month’s reading was up from 123.3 in February and 120.4 in March 2013.
The index measures changes in wholesale used-vehicle prices and is adjusted for vehicle make, mileage and time of year.
Webb summed up the health of the used-vehicle market as “indeed good.”
Sales of certified used vehicles in 2014 are expected to exceed the number of vehicles coming off-lease in 2014, as was the case in 2012 and 2013, he said. Off-lease vehicles are the bread and butter of most certified used-vehicle programs and strong sales help buoy prices.
Based on anecdotal evidence gleaned from conversations with dealers, used vehicles purchased at auctions are turning “quickly” and “efficiently,” he said.
“As a result, profits are very, very strong,” he added. “The competitive nature of the market means that dealers will keep on bidding on units up until the point that their margins are reduced to the minimally acceptable level.”
Because of the improving labor market and favorable retail credit environment, Webb said he doesn’t expect the market fundamentals to materially change in the months ahead.