Pricing Dynamics: Wholesale Prices Appear Headed For Another Banner Year

by Marcie Belles

“ The scrappage rate suggests 12.5 million cars a year, and we’re not producing that, so cars are getting older and older. There is a lot of pent-up demand. At the margin, people are being forced into getting a new car.” — Ira Silver, Economist, National Auto Auction Association

Onward and upward. That is where remarketing appears to be headed in 2010, since the right combination of elements is in place to push wholesale values higher next year. Limited supply, improved demand, an aging fleet, stable gas prices and incentives are all expected to unlock strong used-vehicle prices in 2010.

“Demand for used cars should be at least as strong as it is right now,” says Tom Kontos, chief economist for auction services company ADESA Inc. “With supply being somewhat constrained, prices should continue to go up on a year-over year basis.”

Kontos’ estimate for wholesale prices: 2 percent to 4 percent growth in 2010, on top of an expected 2 percent increase for 2009. Recordhigh gas prices in early 2008 and the effects of stalled credit markets in the latter half of the year dragged down auction prices 4.4 percent. So far this year, manufacturers have cut production levels nearly 50 percent to better meet demand. Plus, slowing new-car sales — down 25 percent through October — have translated to fewer trade-ins, further limiting supply. Another contributor: the government’s “Cash for Clunkers” program, which fueled nearly 700,000 sales this summer and took the same number of vehicles off the roads by sending them straight to salvage yards. Plus, the peak replacement age for vehicles occurs between 10 and 15 years of age,and nearly half the cars on the road today fall into that age bracket.

“The scrappage rate suggests 12.5 million cars a year, and we’re not producing that, so cars are getting older and older,” says Ira Silver, economist for the National Auto Auction Association. “There is a lot of pent-up demand. At the margin, people are being forced into getting a new car.” Overall, both new- and used-vehicle sales should inch higher next year. “It will be a much better situation in 2010, provided the economic recovery has legs,” Kontos says. “We will see stronger new- and used-vehicle sales in 2010.” Predictions for new-car sales hover around 11.5 million units, though Silver estimates 12 million or even 12.5 million.

Used-car sales, meanwhile, are expected to tick up to about 37.5 million units, from an estimated 35.5 million in 2009 and36.5 million in 2008. Budget-conscious consumers in need of vehicles may opt to save money by buying two- or three-year-old cars rather than new ones.

Another indicator of supply is dealer consignment volume, that is, the number of vehicles dealers sell at auction. Year-to-date, dealer consignment is down 10 percent, Silver says, accounting for about 40 percent of the nine million cars auctioned off in the U.S. Historically, dealer volume comprises closer to 50 percent of auction sales. New-car sales of 11.5 million units should start to generate dealer consignment volume, says Tom Webb, chief economist of auction company Manheim.

Meanwhile, the limited vehicle supply has bumped up auction prices for the past year. The Manheim Used-Vehicle Value Index posted its highest reading since Manheim started to track prices 14 years ago. In September, the index hit 118.5, up from 116.4 in August and 110.8 in September 2008. A slight dip in October, to 117.4, has been attributed to seasonal factors. Retail prices will also stay high, says Jessica Caldwell, a senior analyst at, especially for trucks, SUVs, and minivans. “There’s a lot less supply, a lot fewer choices,” she says.

Plus, lower incentives will help. “Production more in line with demand will help keep incentives in check next year,” Caldwell says. “At the beginning of 2009, manufacturers were still producing for a 15-million-unit year. But now they’re prepared for 10 million. [As such,] the average incentive in 2009 will likely shake out around $2,800 per vehicle. In 2010, it will be around $2,500.” Expected higher but not spiking gas prices in 2010 will eliminate the severe vehicle-price gyrations that occurred in 2008. At the time, highpriced fuel all but dried up the sale of SUVs and light-duty trucks, causing resale values to tank. Next year, though, gas prices will be “around what they are now, maybe a little higher,” but still less than $3 a gallon, Silver says.

The biggest obstacle to recovering vehicle sales, economists warn, is the unemployment rate. “One out of every 10 people is without a job, sothat’s pretty tough,” Caldwell says. “That’s a big factor.” Besides, some areas have been hit even harder, she adds.

Consumers will take note when the unemployment rate levels off. “When it stops going up, people’s attitudes become much more positive,” Silver says. “It depends how high it is, and what direction it’s going.”

Though economic growth is on the rebound, it will take a few months before employment numbers rise. “It takes a while for employers to need to start hiring again,” Silver says. “What’s happened is that in the last couple quarters, productivity has increased at a very, very fast rate. Companies are producing more with less people.” Only when growth outpaces those efficiencies will companies seek out new employees.

Another issue that skews the unemployment rate is that when the economy starts to improve,
the discouraged workers who left the labor force try to join it again. There might be spouses that opted to stay home with their kids or got laid off and didn’t bother to start looking for a new job. “So then you have two people unemployed, not one,” Silver says.

Still, next year the industry will shape up to be pretty solid. “2010 will be better than 2009, not gangbusters,” Silver says. “My expectations are a bit more optimistic than the average, and that’s because things up until now have worked out much better than people expected three or four months ago.”

A key improvement for 2010 is that the perception has changed. “Manufacturers have set their expectations lower,” Caldwell says. “If we hit [new-car sales volume of ] 11.5 [million units], they’ll say, ‘Hey, that’s great.’”

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