Residual values for used cars will subside slowly over the next three years as the effects of the economic “COVID hangover” subsides, but meanwhile those values are helping borrowers, J.D. Power analysts said Wednesday.
David Paris, a senior manager of market intelligence at J.D. Power Valuation Services, said used car prices will eventually subside, but the new normal expected to arrive by 2024 will be much higher than a pre-pandemic buyer would have ever envisioned.
At the end of 2020, Paris’ unit expected residual values for an average three-year-old vehicle to be 49.4% of its original sticker price by the end of 2021. Now he said it expects residual values will be 65% by the end of this year. Paris described the increase as both “historic” and “just insane.”
“It’s never been seen before,” he said.
Luke Donahue, a senior consulting manager for J.D. Power, said buyers are borrowing a smaller percentage of the price to pay for new cars than in past years because of higher trade-in values and higher down payments.
Loan-to-value ratios were 93.9% in October, compared with about 99% in 2020 and 102% in 2019.
Terms continue to lengthen, but Donahue said that is a continuation of a long-term trend with no apparent impact from the pandemic. The most common term is 72 months, which now accounts for about 47% of new car loans.
The J.D. Power analysts spoke during the “State of the Auto Industry” webinar sponsored by the CUDL Network, a service begun in 1994 by CU Direct, a CUSO based in Ontario, Calif., 35 miles east of Los Angeles.
Fed data showed sales of new cars and trucks went from 16.9 million SAAR in December 2019 to a low of 8.6 million in April 2020, two months after COVID-19 was declared a pandemic.
It improved to 16.3 million by December 2020, and took off in the spring, peaking at 18.3 million in April.
Cox Automotive reported Wednesday that the average transaction price for new cars was $46,036 in October, up 2% from a month earlier and up 12.9% from October 2020. It reported Nov. 5 that used car prices in October were up 38.1% from a year earlier.
Used car sales have also been falling. Cox Automotive estimated the total of used vehicle SAAR sales were 35.9 million in October, unchanged from September and down 10% from a year ago. Retail used car sales followed a similar pattern.
For new cars, Donahue said March, April and May were the peak sales months this year.
“We were crushing it overall at the start to this year without massive incentive programs,” Donahue said. “In the last several months, we’ve seen things fall apart very quickly.”
Shortages caused sales to fall in the summer, reaching a low of 12.2 million in September. In October sales rose to 13 million, according to Fed data.
About 60% of buyers chose dealer financing in October, and half of those chose captives, Donahue said.
New car prices in October were 29% higher than two years earlier. However, rising prices also benefitted trade-ins, and the value given to buyers has been able to offset half of price increases this year, Donahue said.
Shortages are likely to continue to affect new cars throughout next year because fleet buyers “are starved and most likely will suck up any additional production,” Donahue said.
New car inventory stood at 915,089 vehicles at the end of September, down from 1.01 million at the end of August, according to Cox Automotive. That supply compared with nearly 2.5 million vehicles in 2020 and 3.5 million in 2019.
Paris said the previous normal level of new car inventory was about three million units, a level that won’t be reached anytime soon. However, reaching two million vehicles will help the market get closer to normal.
“Inventory is going to remain a major concern through the end of this year,” Paris said.
“The COVID hangover” has contributed to the increase in prices for used cars by 15.5 percentage points this year, or about $6,100 based on the average three-year-old vehicle brought to the market. Paris’ shop analyzed factors contributing to the increase, and weighted them:
- 4 points because of constrained used car supplies;
- 3 points because of demand;
- 3 points because of shortages cutting new car production;
- 3 points from the economy’s health and higher housing prices;
- 1 points from lower incentive spending; and
- 1 points from hurricanes, which forced more people into the market.
Paris said he expects the COVID economy hangover to dissipate slowly for auto sales by early 2023. Residuals should fall to 61% by the end of 2022, 55% by the end of 2023 and arrive at a new normal of 54% by the end of 2024.
“We expect used prices to come down from the insane highs they’re at right now,” he said. “When we get to the bottom, used car prices will still be at historic highs.”
The CUDL Network is used to handle indirect auto lending by more than 15,600 dealers and 1,138 credit unions.
Lenders funded 1.6 million loans through the CUDL auto lending network through the first nine months of 2021, generating $42.6 billion in credit union auto loans, up 14.3% from the first nine months of 2020.
Used car loans were 74% of the number of loans and 65% of the value of loans through October through the CUDL network.
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