Jeremy Robb, senior director of economic and industry insights at Cox Automotive, Melinda Zabritski, head of automotive financial insights for Experian Automotive, and Tom Kontos, chief economist of ADESA, delve into economic data and insights during the ARA Summer Roundtable near Dallas.
Photo: Martin Romjue / Bobit
If you sample closely the array of metrics defining this year’s vehicle remarketing trends, you’ll find something for everyone: Numbers that point to economic recovery and health and ones foretelling reasons for doubt and concern.
It was such a grab-bag of stats that engaged three industry economists during the Automotive Remarketing Alliance’s annual summer conference in Dallas on Aug. 20-22.
Tom Kontos, chief economist at ADESA Auctions, Jeremy Robb, senior director of economic and industry insights at Cox Automotive, and Melinda Zabritski, head of automotive financial insights for Experian Automotive, reviewed dollops of data defining the wholesale and used vehicle sector and the wider economy.
Market Macro Outlook Holding Together
Considering the last few years of high inflation and interest rates, those rates are likely to stay near current levels, as the economy appears to be landing without turbulence, Kontos said.
“When I look at the numbers, I’m not quite as alarmed. We’re still seeing job growth of 100,000+ monthly. It’s not quite at the clip we were seeing previously. That does get people thinking we’ve sort of engineered a soft landing so far, which might give people the expectation that the Fed will start lowering rates again.” [The Fed lowered rates by half a percentage point on Sept. 18].
The consumer price index (CPI), which excludes the costs of energy and food, is tapering back closer to the 2% benchmark the Fed is targeting, he said.
Regarding the looser money available from the previous period of lower interest rates, “they’ve taken away the punch bowl for a long time now, and the party’s starting to simmer down enough where they’re concerned that it might die altogether,” Kontos said. “They don’t want to induce the unemployment rate to rise too rapidly.”
Overall, the economy is still in a high-interest rate environment, but likely to come down. The labor market is still solid, but not as strong as 2021-22, and inflationary pressures remain despite the partial comedown. The prices of used vehicles range well above pre-pandemic levels.
“Affordability is still going to be a problem with these high prices that result from past inflation,” Kontos said.
Buyers Throwing Down More Cash
In the higher interest rate environment, average loan amounts for new vehicles are still above $40,000, and about $27,000 for used vehicle loans, Zabritski said. However, only 38% of used car purchases involved financing, and new vehicle purchases are pulling about 20% more cash than last year. That increased cash level took about $40 billion out of the finance space last year.
While new vehicle leasing accounts for about 25%, EV leasing comprises about 40%, with two Tesla electric vehicle models in the top 10 leased.
“Our loan levels are a bit lower than before, but consumers are still buying despite the much higher monthly payments,” Zabritski said. “We must remember your average consumer is coming back to market now. Their last purchase was five years ago when the average new car payment was the same as an average used car payment now.”
Affordability Up from the Bottom
Interest rates on new car payments average about 10%, whereas they used to be 8% in 2019. For used car payments, they’re 14%, up from 10%. While used vehicle prices are about 25% higher compared to 2019, they have declined in the last few years, Robb said. Overall, used vehicles are somewhat more affordable than new ones.
The underlying data shows that consumers still struggling with affordability given that they are paying more for an older car, which means they are paying more cash out of savings and/or financing at higher interest rates, Robb said. Meanwhile, an older car requires more maintenance and parts, which cost more due to the inflation of the last three years.
With used car prices back to mid-2021 levels, more buyers are coming off the sidelines since many haven’t bought a car in five years, Robb said.
“Some people saw the inflation of the 1970s and 80s but many people in the U.S. now are not used to seeing what we’ve seen in the last few years,” he said. “Prices haven’t come down; they just aren’t going up as much.”
As a result, consumers are more strapped for money and must make choices while also driving up credit card usage subject to higher interest rates. “It’s very circular in terms of how it all works together,” Robb said.
The Interplay of Supply and Demand
One question posed during the panel is whether new vehicle production has overcorrected the supply shortage from the pandemic while slower job growth has caused buyers to hesitate. Meanwhile, delinquency rates on vehicle loans have increased, including for auctions.
“There’s a potential for a hard landing on the demand side that would choke off much of the replacement demand for used cars,” Kontos said. “The repos are not flowing in waves, but they are coming in gradually higher each month.”
Robb pointed out that vehicle supply is up 50% year over year, although annual supply still stands at 800,000 to 900,000 fewer vehicles than before the pandemic.
“We’re still much less than where we used to be, even though we’ve grown exponentially over the last year,” Robb said. “We’ve seen much growth from some struggling people and are now getting the supply chains back up.” Toyota, for example, has the lowest supply out of all the automakers. And days’ supply for the industry is about 75 days, which is still below long-term averages.
About 7% of the average transaction price of a new car is incentive-related, Robb added. “Long term that could be somewhere around nine to 10% so we still have room to grow, but the price of the car is higher too. The actual dollar incentive is not too far off from the long-term average right now.”
Leasing Lurches Toward Calmer Currents
One way OEMs are moving more vehicles is through leasing. The heavier leasing volume of 2021 constrained used vehicle supply, which eased earlier this year as the vehicles returned to market. “We’ve probably gone through the bottom, so it’ll start to get a little bit better,” Kontos said.
Among new vehicle sales, fleets are a bright spot, with their percentage share of the market back to normal levels and volume slightly below 2019 figures, according to vehicle registration data. New vehicle sales into fleets have fallen slightly compared to last year but are still heftier than two years ago, Kontos said.
More cars are flowing to auctions because more dealers are not taking back leased vehicles that buyers are turning in, he said. As a result, auctions are seeing overall growth in commercial vehicle sales. The number of off-rental fleet vehicles and repossessed vehicles likewise are increasing.
“Overall, the fleet sales are picking up a bit at auction, putting a little downward pressure on price, but the dealer consignment volumes are still pretty absent,” Kontos said. “Dealers hold on to a lot more in trade than they used to. They find a good market for those, whereas they used to try to wholesale those units. There’s still a slight loss versus pre-pandemic (levels), and even versus last year.”
Loan Volume Shows Mixed Signs
The loan market is a captive one now, with the captive vehicle financers at a 12-year-high market share of 60% when including leased vehicles, Zabritski said. When interest rates rose, credit unions dominated the market because they were slow to increase their rates. Banks have pulled back on the vehicle loan market as many chose to focus more on direct lending. Now credit union share is receding as they rebalance their portfolios.
“We saw this with the banks in 2009-2010 when the auto market got turned right back on, and they put on a lot of (market) share and rebalanced,” Zabritski said. “And we’re seeing that again now, because mortgage originations are low, and so everyone’s gotten a little bit overweighted in auto.”
Another trend in the loan market is a rise in delinquencies with about 1% of $1.5 trillion in outstanding loans at least 60 days delinquent — the highest since 2009.
“The levels of delinquency we’re seeing right now are not unexpected,” Zabritski said. “I don’t think it was a surprise for anybody. While we have higher delinquency levels, our charge-off levels and amounts as a percentage are lower than they’ve been in five or six years.”
Total new vehicle volume still hovers around the 15 million mark, which is about two million units below the historical average of 17 million new vehicles manufactured per year.
Leasing Maturities and Used Vehicle Equity
From 2019 to 2022, the automotive industry saw about four million lease maturities each year, Robb said. As leases have matured, lease volume declined 11% in 2023 and will go down another 11% this year, he said.
“Most of the contraction in those lower lease maturities is happening in Q3 and Q4, so we’re just starting to see the bigger contraction going on,” Robb said. “That’s because most leases are 3 years/36 months, and we go back three years from now (to see the effects).”
Robb predicted the leasing maturity market will bottom out in 2025 with 2.5 million lease maturities, but the return rate on that volume is hard to measure. The average industry return rate has been about 60% on a more typical volume of about four million lease maturities.
“When (vehicle) values went so high in 2021 and 2022 the lease return rate for the industry dropped to about 10%,” Robb said. “So, we had four million lease maturities, but only 400,000 came back to the marketplace. That’s when we saw very few off-leases coming into the (retail) and wholesale markets. Now we’re at this point where lease equity has come down, although it’s still positive.”
Lease equity usually averages about $1,500 negative in a normal market. Now, it still stands at $2,000 positive (per vehicle), Robb said.
“We’ve got a long way to go to get there, and with the contraction in maturities we are experiencing and will see for the next few years, the question (becomes) what happens to wholesale values and lease equity? There will be some give and take because many factors are moving in the market now for the next few years.”
Among the moving parts are lease extensions and lease pull-forward activity along with the lease originations and lease terminations.
Electric Vehicles Becoming More Affordable
EV transactions are up about 8-9% compared to last year, Robb said.
“The good thing is for new EVs this year the growth in sales matches the inventory growth,” he said. EVs are still at about 100 days’ supply of the marketplace as it was last year.” Many OEMs have delayed or curtailed new EV production due to market pressures from a flatlining buyers’ market. It’s an ever-moving target as to what happens, he added.
Meanwhile, incentives are gaining in the new EV market, but the more dynamic EV market is the used one, Robb said. Dealers can take a $4,000 federal tax credit on a used EV, which for many buyers equals a typical down payment.
“We started seeing our weekly transaction data of used EV sales increasing in January, and it has really picked up. Used EV sales are up about almost 17% year over year. Inventory is only up about 20% so days’ supply of used EVs is down.
EVs also have a better range on one charge, boosting buyer confidence to try them out, Robb said. In Q2, 40% of new EVs were leased. New EV lease payments now run about $380 to $440 per month which makes them more affordable.
“If they’re under $25,000 and you get the tax credit, that makes them far more affordable for consumers,” he said. “People need to try them. Having a better supply of used EVs may really helps the industry on the new car side.”
