In a news conference at the Las Vegas Convention Center in conjunction with the 2016 NADA Convention and Exposition, Jonathan Banks, NADA Used Car Guide’s executive analyst, presented a used vehicle market forecast for the year which included numerous insights by the industry’s leading provider of vehicle valuations.
According to Mr. Banks, the supply of used vehicles, credit conditions, and new vehicle incentives will reverse course from where they have stood the past five years.
The supply of vehicles in the used market will increase significantly in 2016.
Mr. Banks said, “We’re looking at a surge of about 800,000 vehicles coming off their leases this year. Most of that volume will be dominated by compact and mid-size cars with mid-size and compact utility volume considerably higher as well.”
As a result of the increase, late-model supply is forecasted to hit its highest level since 2008 and will be the biggest drag on used vehicle prices this year.
Credit conditions will likely reverse this year even though they are currently solid. At some point, however, the Fed will follow up its Dec. 2015 decision to increase its target funds rate. As a result, new and used vehicle loans rates should increase subtly.
Like credit and supply, new vehicle incentive prices are forecasted to switch direction this year. For the past five years, used vehicle prices have been very strong. A low used vehicle supply and fantastic credit conditions contributed to stable used vehicle prices, but as a result of changes to both supply and credit, OEMs will likely be more aggressive in their incentive spending.
Mr. Banks noted the outcomes of the reversal in used vehicle market trends that will contribute to an expected 5 to 6 percent decline in used prices. Among them, depreciation as a result of higher incentive spending, will likely be a key outcome of the changed market.
Steeper depreciation will increase the amount of time banks and consumers are in a negative equity position. This makes it harder for dealerships to sell vehicles in the future and raises the risk of higher incentive pricing. In general, depreciation will increase most for trucks and utilities due to sharper increases in supply, however overall declines will be less than on cars.
In one scenario, Banks noted how the number of leases taken instead of traditional financing has exploded over the past several years (the explosion can partially be attributed to high vehicle retention values as they keep payments low, despite higher new vehicle prices). If new vehicle prices are kept low with bigger incentives, they will become a drag on used vehicle prices moving forward.
As Banks remarked, “The big question is how much will OEMs increase incentives to cover the added expense? The size of the lease market would cost the industry hundreds of millions of dollars for mid-size utility vehicles alone.”
