10 sep 18

U.S. used-vehicle prices break through $20K threshold

A flood of end-of-lease vehicles, and the aftereffect of last year’s hurricanes: those two factors were going to depress U.S. used-vehicle prices in 2018. Surprisingly, the reverse has happened. Overall depreciation was 13.7% in the first six months of the year, almost 3 percentage points better than in H1 2017. 

First, some background on the state of the U.S. used-vehicle market, from Edmunds’ recently released its Q2 Used Car Report:

10.4 million units

  • Half-year sales have risen steadily since at least 2012 when they were 8.9 million units. In 2018, they were just over 10.4 million (up 2.5% over H1 2017).
  • Certified pre-owned vehicles also increased 2.5% over the same period, for the first time passing the 700,000-unit threshold.
  • Average used-vehicle prices reached $20,153 – for the first time breaking the $20K threshold. The increase (+3.3% over Q2 2017) was also a record.
  • Due to the constant supply of off-lease vehicles, three-year-old cars account for nearly 25% of all franchise dealer sales, a record. Despite high levels of inventory, they're selling in an average of just 38 days on the lot – the lowest figures since 2005. 

So, how did the U.S. used-vehicle market get where it is today? Let’s wind back to 2015, the fifth consecutive year of record new-vehicle sales in the U.S., lease penetration of the market passed the 30% milestone. 

Extra volume
Those vehicles are coming off lease this year, threatening by their sheer volume to reduce the residual values (RVs) – or, seen from another perspective, increase the depreciation rates (DRs) – in the overall used-vehicle market.

That was the theory. But, as shown by recent Black Book market data, U.S. remarketers have deftly distributed the extra volume via a variety of channels, including towards the growing ride-share market.

Vehicle replacement
Another threat to used-vehicle prices that failed to materialise was connected to last year’s hurricanes. At the end of 2017, used-vehicle prices were abnormally high. The 12-month depreciation rate for used vehicles stood at 13.2%, much lower than the predicted 16.5%. 

High used-vehicle prices were caused by the widespread replacement of vehicles lost in the storms earlier last year. It was assumed that, come 2018, a price correction would push used-vehicle prices down again. Quite the reverse has happened. According to Black Book, vehicle depreciation stood at 13.7% during the first half of 2018, year on year.  

Three segments
Even considering the better than expected performance of the overall used-vehicle market, three segments performed exceptionally well – not coincidentally all three segments favoured by commercial fleets. 

Pickups and LCVs both depreciated just under 10% in the first half of the year, while compact crossovers depreciated 12.4%. Pickups are an important asset especially for mining, utility and construction companies, meaning that the supply of new pickups is well balanced with the demand for used ones.

Price parity
Conversely, U.S. corporate fleets have been moving away from the compact and mid-size sedan segments, which have seen their DRs increase over the past years. Surprisingly, both segments have maintained their RVs this past half year – a result of steady demand and declining supply. 

Trucks, however, will become increasingly plentiful on the used-vehicle market, causing a drop in RVs and eventually leading DRs for cars and trucks towards price parity. Talking about parity: cars currently account for 51% of the used market while trucks account for 49%.

Crossover oversupply
For the rest of the year, experts expect especially the price of used crossovers to go down, due to an oversupply in this segment. With used LCV supplies low, their RVs should remain strong. 

While U.S. remarketers may rejoice in the strength of America’s used-vehicle market, analysts point out that it is an anomaly. Projections for total used-vehicle sales for 2018 are about 38.5 million units, with a similar figure predicted for 2019 – meaning: no growth. Add to that a higher depreciation rate, forecast at 16%, and this year might be remembered as an exception.

Authored by: Frank Jacobs