We’ve frequently stated that lower used vehicle supply has played a critical role in keeping used vehicle prices high over the past two years.  However the supply of vehicles being wholesaled through physical auctions has experienced even sharper declines than the market as a whole, and as a result wholesale auction prices continued to reach record levels during May and into early June. 

While we have likely reached a peak in used prices for a variety of reasons, NADA does not expect prices to decline dramatically which is an assumption that is supported in large part by supply data shown below.

NADA’s analysis estimates that overall used supply is down by ~2% year to date in 2011. Conversely, wholesale auction volume as reported through AuctionNet is down an even greater 10% on a year over year basis.

An even more striking statistic is the variance between overall used supply and auction sales for compact cars.  NADA estimates that used supply for compact cars is up ~5% year to date while auction volume is down by 16%.  A similar pattern exists for mid-size cars where overall supply is down by 1% but down by 11% at auction.  Trucks are also showing this pattern although at less of a variance than passenger cars.  In contrast, the variance between the estimated used supply and auction sales volume during 2009 and 2010 exhibited a much closer relationship than what we are seeing today.  The big exception is on Large SUVs in 2009, which is a result that can be attributed to declining supply and a large spike in demand after gas prices dropped precipitously from their July 2008 peak.

Auction prices are the barometer against which  used vehicle values are measured, so the high prices consumers are enjoying on their vehicle trade-ins are dictated by the prices dealers are paying at  auction.  Since most of the thirty-five thousand independent auto dealers rely heavily on traditional brick-and-mortar  auctions for their inventory, they are faced with an environment of very tight supply which exceeds the market as a whole.  What makes this situation more interesting is that strong demand for used models contributes to lower supply at the auctions.  This occurs because increasingly used vehicles are being acquired farther upstream of traditional auctions by the franchised new car dealer.

Franchised dealers have greater access to used stock by way of increased trades resulting from new and used vehicle sales, having the first right of refusal for leased vehicles that have reached end of term (if the consumer decides not to purchase first), and through online marketplaces such as GM’s SmartAuction that provide dealers with the opportunity to purchase brand-specific units from their manufacturer or captive finances company before they are sent to a physical auction.  

In most cases this removes a large majority of pristine condition,  low mileage vehicles from the traditional auction channel, which correspondingly changes the mix of vehicles available.  The result is an increase  in prices for  all used vehicles, particularly those  vehicles sold at a  physical auction., This is even true for models that may have been considered undesirable in the past.

NADA estimates indicate that used supply will continue to decline  throughout 2011 & 2012.  Demand metrics for used vehicles provided by the Conference Board and CNW Research all indicate positive trends for used vehicle demand.  In addition, gross profit margins for used vehicles are ~9% higher than on new vehicles according to NADA’s Dealership Financial Report, and most franchise dealerships have made considerable investments to improve the used vehicle buying experience.  Because of this, franchise dealer demand will continue to be strong for used models which will perpetuate the tight inventory at brick-and-mortar auctions and will help keep used prices high during the upcoming months. 
It is a tough situation for independent dealers, but a positive one for consumers who can count on a strong trade in value if they are in the market for a new vehicle.