Tuesday, June 09, 2009

5th Monthly Increase in Used Vehicle Value Index

MANHEIM CONSULTING -- May marked the fifth consecutive monthly increase in wholesale used vehicle prices on a mix, mileage, and seasonally adjusted basis (see charts above). The Manheim Used Vehicle Value Index now stands at 109.1, which resulted in the first year-over-gain in pricing since October 2007. May's rise in wholesale pricing was a result of continued favorable supply/demand forces, an improvement in consumer confidence, and better availability of retail financing. All of these forces will continue, or strengthen, in the months ahead.

The Conference Board's consumer confidence index posted large gains in both April and May, which brought the index back to its highest level since September of last year. Not unrelated, the Manheim Index also moved back to its highest level since September of 2008 (see chart below). Consumer confidence is an important indicator of the consumer's willingness to take on a big purchase such as a used vehicle. The consumer's ability to buy has been helped by the greater availability of retail financing. In particular, many lenders have been willing to advance larger loan amounts for a given vehicle.


At 6/09/2009 9:11 PM, Blogger Robert Miller said...

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At 6/09/2009 9:29 PM, Blogger KJ said...

Miller - you always sound so sure of yourself...if you took more than 30 seconds to examine the graph, you'd clearly see that in the last recession, used car prices did not go up...so your theory is all wrong.

At 6/09/2009 10:28 PM, Anonymous Anonymous said...

Approximately 14 million vehicles go to the junkyard every year and we're only buying about 9 million new cars per year right now. People may be holding on to their cars and/or buying used as much as they can, but accidents and old age are facts that cannot be argued away. The more used cars that are purchased, the fewer are available, the more expensive they become.

This trend will not continue much longer. As used cars get more and more expensive, people will opt to buy new. Who knows what that used car's been through? Why take a chance on it when, for a little more money, you can buy a new vehicle with full warranty coverage, free oil changes, newer gadgets, more advanced safety features, etc.

Expect to see auto production ramp up big time later this year, early next year at the latest.

At 6/09/2009 10:32 PM, Blogger Robert Miller said...

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At 6/09/2009 10:47 PM, Blogger Robert Miller said...

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At 6/10/2009 9:06 AM, Anonymous Anonymous said...

This trend will not continue much longer

Why not? It's only been going on for a decade; scrappage rates have declined and the age of the fleet has increased.

Polk data

Does the US really need so many vehicles per capita; 764 motor vehicles/1000 population? It seems to me that vehicles per capita could drop 10% without any substantial inconvenience or dislocation.

At 6/10/2009 11:45 AM, Anonymous Anonymous said...

@Robert Miller: "Wholesale car prices are based on dozens of factors affecting both supply and demand. The price alone is completely uninformative."

Prices are the result of all of those dozens of factors and tells us more in the aggregate than your speculatation about the true reason (in your opinion):

"[blah blah blah]. Hence wholesale used car prices rise."

Besides, you are simply speculating from a different angle than the referenced article...your [blah blah blah] is macro economic "voodoo," also. Don't know if your realized that when you were pecking out your condescending Magnus Opus or not. PhD. or not, you haven't any better clue than any other participant here. Matter of fact, your hubris may impair your ability to judiciously apply Occam's Razor to economic phenomena. It is proved beyond PhD. hand-waving that univariate approaches to forecasting inflation beats the multivariate sophistry of PhD. econometricians. Look it up, it's true.

Good day, Doctor.

At 6/10/2009 2:59 PM, Blogger Alan said...

I think a lot of what is happening here is like the inventory reduction we are seeing all over the economy. People probably had too many cars from the boom period and possibly as a result of the inflated housing prices giving them the ability to add an extra car. That inventory is being reduced. It is reality that scrappage and new cars are at an imbalance now, my suspician is that the imbalance will have to end when the inventory supply of new cars has been drawn down. The price index for used cars is one mechanism of visibility into how that inventory is moving. As the inventory gets into shorter supply the prices will continue to rise pushing more people into buying new cars.

Assuming consumer confidence continues to rise I expect to see new car sales increase throughout the year - and if there isn't some other economic shock that hits.

At 6/10/2009 9:14 PM, Blogger Robert Miller said...

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At 6/10/2009 9:54 PM, Anonymous Cheech (in) Marin said...

Anonymous, did you even bother to read the Mannheim report yourself?

Dismal new vehicle sales push dealer consignment volumes lower. In May, the seasonally adjusted annual selling rate for new vehicles remained below the ten million mark for the fifth consecutive month.

Is that an indicator of an improving economy? Not!

Given that retail used vehicle sales have been flat (and actual demand higher), the resulting loss of trade-ins from new vehicles sales (the majority of which re-enter the wholesale market) has caused dealers to aggressively bid for late-model used vehicles.

The only way sales can remain flat while prices rise and demand increases is if supply decreases by an offsetting amount. Mannheim gives no evidence for demand for used cars increasing, they just assert it. Falling supply of used cars alone can explain rising prices.

If used cars are substitutes for new cars, then falling prices of new cars would decrease demand for used cars, all else equal. If used cars are an inferior good, falling incomes would increase demand, but falling incomes are a sign of a weak economy, not a strong one.

some new vehicle inventory is now being heavily discounted.

This is more evidence of declining new car demand and no improvement of the economy. The only way you can have falling new car demand (and prices) coupled with rising used car demand is by falling incomes.

off-rental volumes into the wholesale market were off more than 30% in the first five months of 2009.

Car rental agencies are hanging on to their vehicles longer. More evidence of sluggish rentals and cost-saving measures. More evidence of a struggling economy.

Consumer confidence is an important indicator of the consumer's willingness to take on a big purchase such as a used vehicle. As an offset, however, April spending and income data clearly showed that households remain in a savings mode. The personal savings rate jumped to 5.7% in April, the highest level since February of 1995.

Mannheim points to an aggregate index of consumer confidence which only suggests an increased willingness to take on a big purchase. It doesn't prove it. Consumer confidence is determined by survey data. I'll take actual observations of people's behavior over what they "say" any day of the week. Did you ever hear of the Axiom of Revealed Preferences?

In the very next sentence, Mannheim gives hard data that savings is up as consumers retrench. So hard data contradicts the surveys.

The consumer's ability to buy has been helped by the greater availability of retail financing.

An assertion with no supporting evidence. Banks are particularly loathe to lend money on a used car because they depreciate so fast and the loan-to-value ratio is poor. Interest rates on used car loans are much higher than for new cars. Buyers of used cars also generally have poorer credit quality than new car buyers.

If the economy is improving, consumer confidence is up, prices of new vehicles are down, gas prices are down, and financing opportunities are strong, then why are new car sales declining?

These things cannot all be true. By eliminating the things we know are true, you can figure out which things are not true. What's not true is that the economy is improving.

Wholesale pricing for large pickups and SUVs is up sharply from a year ago when there was near $4-a-gallon gasoline

The price of a complement has decreased, so demand for the good increases. This is not evidence of an improving economy. Gas prices are low because of low demand for gas from a bad economy.

Nearly every indication in the Mannheim report refutes the hypothesis of a strengthening economy. The only "conjecture" in Rob's analysis which this report refutes is financing opportunities and I find that assertion dubious.

At 6/10/2009 9:55 PM, Anonymous gettingrational said...

On the Micro side it looks like the Cash for Clunkers ($4500) looks like a go. Therefore the $1500.00 valued car that my kids drive will be worth $4500.00.

On the Macro side the Sigma(I hope used this correctly!) of all the used car values under $4500.00 brings up the total used car price index. There must be millions of these cars.

Which kid gets to use the Clunker for trade-in? Don't I get a new car?

At 6/11/2009 11:09 AM, Anonymous Anonymous said...

@Dr. Miller: "I'm not at all 'speculating' about the used car market - the orignal author did. I gave a perfectly reasonable explanation about why used car prices rising is more likely the result of a bad economy than a good one."

Perhaps you could suppress your egotism long enough to recognize that your "perfectly reasonable explanation" is also pure speculation, by definition. "You prove with every word you type you know nothing about" the way English is used to describe the world around us and I venture to say that your understanding of economics is not as rigorous as your mind has convinced you, doctorate degree or not.

Through my undergrad econ and my graduate careers, I have suffered through know-it-all pedants, such as you prove yourself to be. I'm glad that I never had to listen to you in a classroom, self-confidently proclaiming your brilliance while misunderstanding the quesstion and misusing terminology.

You consign yourself to the BB-stacking, pointy-headed irrelevance of theoretical academia, Sir. Good day.

At 6/11/2009 12:00 PM, Blogger Robert Miller said...

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At 6/11/2009 12:07 PM, Anonymous Cheech (in) Marin said...

As I suspected:

"New car purchases remained depressed, with several Districts indicating that tight credit conditions were hampering auto sales."

Beige Book

Contrary to the assertion of Manheim (one n, not two), financing opportunities have not improved for auto sales.

A new car depreciates rapidly in the first several years. Used car loans have higher interest rates and shorter payoff terms than new cars. If used car prices are up, then the loan-to-value ratios would be very high making it unlikely that used car credit is in any better shape than new cars.


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