Slowing growth in off-lease volumes, better mix will help in '18

The 2018 U.S. used-vehicle marketplace is shaping up as less abnormal than last year but hardly old-fashioned.

Forecasters are expecting lower price volatility than 2017's record highs and unusual peak in the fall rather than in the spring. They also see higher volumes of used-vehicle sales in 2018, driven by a more desirable mix of late-model vehicles entering the marketplace and higher take-home pay as the new federal tax law is implemented.

The IRS issued new income tax withholding instructions to U.S. employers earlier this month. In response, Cox Automotive Chief Economist Jonathan Smoke said the company revised upward its forecast of 2018 total used-vehicle sales to 39.5 million from 39.3 million.

"We believe about 85 percent of U.S. households will get a boost in take-home pay," Smoke said in a conference call with investment analysts and reporters.

The forecast revision lifts anticipated volume growth to more than a full percentage point from Cox Automotive's preliminary 2017 count of 39 million used-vehicle transactions for 2017. That may be a modest increase on the used-vehicle side, but most forecasters expect 2018 U.S. new light-vehicle sales to decline 2 to 4 percent to fewer than 17 million units.

December results confirmed that the post-hurricane replacement buying surge of both new and used vehicles indeed ended in November. Without extraordinary demand from people replacing vehicles lost to Harvey and Irma, used-vehicle prices fell from autumn's record heights.

The Manheim Used Vehicle Value Index fell to 133 in December, down 1.9 percent from a month earlier and 5.6 percent from December 2016.

Tom Kontos, ADESA chief economist, said with storm replacement demand gone, "wholesale prices in December returned to patterns seen prior to those events. Namely, prices for cars continue to soften while prices for trucks were up."

In December, wholesale prices of midsize cars fell 2.8 percent, or $299, to $10,438, ADESA Analytical Services data show. But prices of midsize SUVs and crossovers as a category rose $51 to $17,512.

Used-vehicle wholesale prices will continue to fall through the first quarter before firming up in the second and third quarters, Smoke predicted.

ADESA's Kontos says the U.S. economy continues to support strong demand for new and used vehicles in 2018. He cites the low unemployment rate, strong financial markets and consumer confidence, as well as consistent incentive offers from automakers.

One beneficial change for 2018 will be a slowdown in the increasing numbers of late-model vehicles entering the used market.

After a flood of vehicles coming off leases — growing 23 percent in 2016 and 17 percent in 2017, Cox Automotive calculated — 2018 lease returns will grow only 8.1 percent, or 292,000 units.

"The only growth is from off-lease and repos, but there's no growth in off-rental volume," Smoke said. "And most of the growth is in pickups and SUVs, which are more in demand, so grounding dealers will retain more off-lease vehicles themselves. Both diminish reasons for price weakness."

Rental-fleet vehicle returns will fall this year, said Zo Rahim, manager of economics and industry insights for Cox Automotive.

In 2017, rental fleet companies sold 1.7 million used vehicles, but that will fall substantially this year, to "maybe under 10 percent of the market," he said.

Cox Automotive sees one additional factor driving used-vehicle sales: a better mix of used vehicles as more pickups, SUVs and crossovers reach the market.

Rahim said sedans, coupes and hatchbacks amounted to 50 percent of off-lease returns in 2017 but that will fall to 46 percent this year.

For example, Cox Automotive projects less than 40,000 Chevrolet Cruze small cars will come off lease in 2018, down 35 percent from 2017.

Meanwhile, Cox expects more than 70,000 Chevy Silverado full-size pickups to come off lease, almost double 2017 levels.

It sees an even bigger surge for the Nissan Rogue, more than doubling from 2017 to almost 60,000 units.