Features
31 Aug 20

Used prices are up but they will go down again

The inventory of used vehicles on sale across the United States remains low, causing prices to go up. But prices are very likely to go down again on the longer term.

Low inventory

According to an analysis performed by Cox Automotive, the used-vehicle inventory is lower than it has been in years, hovering around 33 days’ supply. A year ago, this number stood at 43.

“Used-vehicle demand has been strong since March’s massive COVID-19 market shock,” said Cox Automotive Senior Economist Charlie Chesbrough. He believes the paycheck protection stimulus programme may have provided used car shoppers the ability to buy new used vehicles.

This programme also delayed many vehicle repossessions due to loan defaults, traditionally a supply source of vehicles to the used market.

High prices

At the same time, average used-car prices listed at a record $20,212 as prices are rising because of low supply.

Used vehicles listed at under $10,000 had the lowest inventory with 25 days’ supply.

Lower prices ahead

Analysts at management consulting firm Oliver Wyman believe the stimulus effects will be finite, adding that unless there is a stable economic recovery, demand may decline leading to falling prices again. In the past, historic shocks have taught us that used-car price dips typically recover slowly to pre-shock levels without external stimuli.

In the case of the United States, this means that used car prices will probably return to a lower level compared to pre-crisis levels for the long term. Improvements should not be expected unless economic uncertainty has widely been mitigated.

Counter-measures

For lessors, things could be looking better. The rigid contract terms of leasing providers and the lack of used-car offerings in the leasing segment mean leasing providers may be forced to monetise off-lease cars into a used-car market that can no longer absorb them, destroying value in the process. Residual value losses could even turn out to be higher than during the 2008 financial crisis, say experts at Oliver Wyman.

That is not to say leasing providers should just get ready for the inevitable blows. There are counter-measures they can adopt: increase flexibility, rethink utilisation models, invest in better analytics and redesign remarketing processes.

  1. Increase flexibility: leasing conditions should be more flexible, allowing vehicles to be kept longer if selling the vehicle can only be realised at higher losses.
  2. Rethink utilisation models: offering used-car leasing or subscription services rather than selling off-lease vehicles can protect leasing providers.
  3. Invest in analytics: the COVID-19 crisis has shown that quarterly or even monthly assessments are not enough. Businesses must invest in real-time data-driven insights.
  4. Redesign remarketing processes: more end-to-end digital sales processes can allow for direct B2C sales of used cars to sell them directly, at the right time, in the right market, at the best possible price.
Authored by: Benjamin Uyttebroeck