Wholesale used-vehicle prices continue to recover from steep lows during the early days of the coronavirus pandemic. But a bumpy road lies ahead.
Used cars and trucks are still expected to head to auctions en masse from rental car companies de-fleeting amid a general lack of travelers. Repossessions also are picking up, and many leased vehicles with turn-back dates deferred because of the crisis are bound to come to the wholesale market, too.
"We really haven't dealt with the supply that's out there yet," said Tom Kontos, chief economist at KAR Global, which owns auction giant ADESA.
The likely influx of vehicles, coupled with economic uncertainty, is why industry observers foresee a period of volatility this summer and fall. While the rebound in retail sales already happening should help offset the disruption, uncertainty abounds. Many millions of Americans are still out of work, and increased unemployment benefits put in place because of the pandemic are set to end in July.
Sales activity at auctions has increased in recent weeks as stay-at-home orders are eased and more dealerships open their showrooms.
The auction sales rate tracked by Black Book was at 49 percent for the week of May 18, up from a low of 15 percent the week of March 30. In the first two weeks of March, the rate — which reflects the percentage of vehicles offered at auction that actually sell — was 65 percent.
Wholesale prices in April were 13 percent below Black Book's projected values. Black Book expects wholesale prices to lag pre-crisis projections for the rest of 2020, with an average decrease of 17 percent.
Laura Wehunt, Black Book's vice president of automotive valuations, pointed to the vehicles expected from rental companies, repossessions and deferred lease returns. "These things are going to come together for another fall in values," Wehunt said, "and then I think we'll start to right-size ourselves."
In the interim, wholesale prices have been closing a gap with retail values, which haven't declined as sharply since the crisis started.
At Manheim, the average wholesale price for 2017 model year vehicles rose 1.6 percent the week of May 18, while retail prices declined 0.1 percent.
"We're seeing the big disconnect closing," Cox Automotive Chief Economist Jonathan Smoke said last week.
Wholesale prices have improved as the glut of used vehicles on the market comes down — at least for now. The rolling, seven-day supply of retail used vehicles in inventory peaked April 8 at 115 days supply, Smoke said. Normal supply is about 45 days. Supply had dropped to 36 days as of May 23. Wholesale supply peaked at 149 days on April 9, compared with normal supply of 23 days, and had dropped to 41 days as of May 23.
According to J.D. Power, auction prices overall during the third week of May improved for a fifth consecutive week, rising 2.3 percent and down just 2 percent from the firm's pre-virus forecast. That compared with a 16 percent drop in mid-April.
At the same time, used-vehicle retail prices were down less than one percentage point for the week ending May 24, J.D. Power said. More than 91,000 vehicles sold at auctions that same week, just 11 percent below the pre-virus forecast.
Since the crisis began in mid-March, auction volume is down by 609,000 vehicles vs. the same period in 2019 and 500,000 vehicles lower than J.D. Power's pre-virus expectations for the period.
One potential upshot for dealers in the months ahead? "It's going to be more of a buyer's market again as this inventory's released into the market" said KAR's Kontos. "Hopefully, we can match that with growth in retail sales."