It’s no secret that off-lease and personal used supply have been on a continuous slide since the middle of last year, as a challenging economic environment, manufacturer bankruptcies and restructurings, and extreme fuel price volatility have taken a dramatic bite out of new vehicle sales – and subsequently the used vehicle supply. 

While the continuation of the downward trend has been widely reported, the extent and extreme depth of the trough might come as a surprise to some, especially as it relates to certain truck segments.

Let’s take a look at new vehicle sales from the past few years to illustrate this point.

Considering that vehicles don’t return to the secondary market in significant quantities until about three years after being purchased new, returning supply through the end of 2009 was a product of new vehicle sales recorded years earlier, or back when new volume regularly exceeded 16million units.

Although new vehicle sales in 2007 fell by 2.5% from 2006, it wasn’t until 2008 – specifically the latter half of the year – that new vehicle sales turned dramatically for the worse, declining by about 3 million units or 18%. 

Keeping our three year used market return in mind, these losses will not be keenly felt until the latter half of 2011, which is precisely where we find ourselves today. (See the “Off-Lease & Personal Supply” chart).

As we can see, the personal return decline (ages 3 – 6 years) actually began earlier than it did for off-lease units, and while the trend moving forward will be considerably less volatile, losses will still be significant nonetheless.  In fact, returning personal supply will drop by nearly 20% from 2009 through the end of next year, and drop another 10% through the end of 2013.

In terms of returning lease units, we estimate that off-lease volume for vehicles aged between 36 – 48 months will drop by 21% in the second half of 2011 compared to the first half of the year (seasonally adjusted).  Contrast this to a “mere” drop of 6% when comparing the second half of 2010 to the first half of 2011. 

Off-lease volume for certain truck segments is where things get really interesting.  For example, high fuel prices and domestic OEM restructurings/bankruptcies in ’08 and ’09 brought leasing for large SUVs to a near halt.  

As a result, the supply of three-year-old, off-lease large SUVs through the first quarter of 2012will drop to an average of less than 100 units per month; this compares to an average of about1,700 units per month for the preceding 12 month period. (See the “36M Large SUV Off-Lease Supply” chart).

With off-lease supply falling to such low levels, used large SUV prices will certainly show less of a response to fuel price spikes.  This is reinforced by used price performance through the first half of this year, as large SUV prices remained resilient in the face of $4 per gallon gasoline.   

To put this into perspective, we estimate that if fuel prices return to $4 per gallon in the first quarter of 2012 compared to the current $3.70, used large SUV prices would decline 3-4% without the aid of falling supply.  However, declining supply will  increase prices by 6% between now and the first quarter of  2012, leading to a net upward gain when both factors are considered. 

When looking at three-year-old lease returns for other segments, significant losses are still on the horizon through 2012, although not nearly to the degree of large trucks.  As you might expect, returns for compact and midsize cars will recover faster than other segments because of the fuel pricedriven shift in demand of a few years ago.  The supply of uxury cars will remain intact.

From a valuation perspective, the last few weeks have given us much to ponder concerning the challenges that lie ahead for our economy and  industry.  Given these significant headwinds, a continuation of the pricing strength witnessed on the used side is hardly a given. 
Countering these threats is the certainty that used supply will continue to fall over the course of the next12 plus months, a fact which should translate into late-model used vehicles – especially those in clean condition with low-to-average mileage – being viewed less as a commodity and more as a valued and desired asset.  Considering the extreme swings in the stock market over the past few days, a “desired asset” is something we can all live with.

(See the August 2011 edition of Guidelines for more information on near- to mid-term used supply trends.)