COVID-19 Market Update · 2020. 5. 5. · COVID-19 Market Update 5-12-2020 SUMMARY Used vehicle values continued to depreciate during the first week of May, but at a slower rate of

COVID-19 MarketUpdate5-12-2020

SUMMARY Used vehicle values continued to depreciate during the first week of May, but at a slower rate of decline. Sales rates at auctions continued to trend upward, driven by retail sales improving in states with loosening restrictions that sent dealers back to the auctions as a source for stocking their lots and the ability for buyers to preview inventory prior to sale, and in select locations, the ability to be present on the lane during sale time. As was noted in the previous update, we saw the largest recorded month over month decrease in wholesale prices in April. Black Book’s Monthly Retention Index dropped by 7.9 points, reaching its lowest level since 2010. Last week we saw a slowdown in depreciation rates for most segments.

Since the beginning of April, we have also observed unemployment claims continuing to increase. Last week, the US added 3.17 million new jobless claims, bringing total claims to over 33.5 million. That pushed US unemployment rate to 14.7% in April – the highest monthly rate since the Great Depression. With a weakening of the economy, consumer confidence is decreasing. The University of Michigan’s April monthly consumer sentiment index was 71.8 points in April, and it is expected to decrease further. In accordance, we project a steep decline in wholesale prices over the next several months, with some leveling off by the winter. In the short-term, the used market will experience strong headwinds due to:

• Incremental supply of used vehicles (lease return delays, downsizing of rental fleet, and un-sold inventory from March-May)

• Decrease in demand of both retail and fleet sales due to the economic downturn

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COVID-19 Market Update

• Pricing pressure on newer used units as a result of OEM promoting incentives on new vehicles Although the economic effects of the pandemic will continue to be felt three years from now, we project that wholesale values will return to the pre-COVID-19 baseline, as used supply will decline due to cuts in retail and fleet sales in 2020 and 2021. Used vehicle prices will enjoy some tail wind in the years to come due to:

• Decreased used supply of newer models due to reduction of rental fleet from 2021 through 2023 • Decreased supply of off-lease 3-year-old vehicles in 2023 and later years • Improved economic conditions with pumped up demand for vehicles (both new and used) • Changes in vacation travel patterns (driving vs. flying, domestic vs. international, etc.) will increase

demand on automobile travel


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CONTENTS

CURRENT WHOLESALE PRICES ........................................................................................4Market Level View .......................................................................................................... 4Auction Insights ............................................................................................................ 4Auction Volume ............................................................................................................ 4Sales Rate ..................................................................................................................... 5

CURRENT WHOLESALE PRICE TRENDS ............................................................................6Market Level View .......................................................................................................... 6Segment Highlight – Full-Size Trucks ............................................................................... 6

USED WHOLESALE PRICE PROJECTIONS .........................................................................8Wholesale Price Impact Under the Most-Likely Economic Scenario ....................................... 8

Short-Term Outlook (Summer / Fall of 2020) ....................................................................... 8Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023) ........................ 9

Wholesale Price Impact Under a Severe Recession Scenario ................................................ 9RETAIL VERTICAL .............................................................................................................9

Retail Prices ......................................................................................................................................... 9Dealers Insights ................................................................................................................................ 10

NEW VEHICLES SALES OUTLOOK ..................................................................................10Most Likely Economic Scenario ....................................................................................................... 11Severe Recession Economic Scenario ............................................................................................ 11Longer-Term View on New Sales ..................................................................................................... 11Acquisitions By Car Rental Companies ............................................................................................ 12

USED VEHICLE SUPPLY PROJECTIONS ..........................................................................13Short Term Lease Return Projections .............................................................................................. 13Rental Unit Returns ........................................................................................................................... 14Longer Term Used Returns Projections .......................................................................................... 15



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CURRENT WHOLESALE PRICES

Market Level View Black Book’s Automotive Analysts have a combined 200+ years of experience in the industry. Through ongoing communication with dealers, remarketers, and auctioneers, our analysts track vehicles in order to independently chart and report the market via daily updates . In addition, our survey personnel attend (virtually at the present time) over 60 auctions every week.

Auction Insights

• Last week was our first glimpse at what it looks like for an auction to resume a physical sale, and by all accounts most would consider it a success. Carolina Auto Auction in Anderson, South Carolina re-opened their doors to dealers for an in-lane, physical sale, and while the lane looked different, with marked off spots for bidders and a plastic up to separate the auction employees from attendees, the outcome was a strong sales rate. The best sales weeks during recent all-digital sales resulted in a little over 40% sales rate, but with the re-introduction of physical bidding, the sale rate went over 70%.

• Sales rates have continued to trend upwards at auctions utilizing digital sales, but at a slower rate of increase.

• Retail for many dealers drastically changed due to the pandemic, but as dealers are re-opening and starting to sell more vehicles, the need is arising for them to return to buying from auction as a means of stocking their lot.

Auction Volume

We continue to see a rebound in volume from the wholesale market. Last week, sales were 20-25% below prior year. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales (and some closed entirely) at the end of March.



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Sales Rate Sales rates quickly tumbled into the teens when the pandemic initially forced people to shelter in place, but sales rates have been slowly climbing each week. Last week, we observed sales rates continuing to increase. Last week was the first week that select locations allowed dealers back onto auction lots, albeit under strict rules, to preview inventory, and a select few allowed dealers back onto the site on sale day. Black Book’s estimate on the Weekly Average Sales rate is presented below.


CURRENT WHOLESALE PRICE TRENDS

Market Level View

Volume-weighted, overall car segment values decreased by -0.41% this past week. This is a welcome sight after 3 weeks of greater than -1.3% week over week depreciation levels. Volume-weighted, overall truck segment (including pickups, SUVs, and vans) values decreased by -0.76% last week. As with the car segments, this was a noteworthy change after 3 weeks of overall weekly depreciations exceeding -1.0%. The graph below shows week over week depreciation rates for the whole market, cars, and trucks / SUVs / Vans.

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Segment Highlight – Full-Size Trucks

Full-size pickup trucks (FPT) continue to gain market share as they have evolved from a simple piece of equipment used to haul or transport heavy loads, to a very practical and comfortable utility vehicle for the family. Over the last decade, FPT market share has grown from 11% to 14%. On the rental side, FPT market share has grown from 4% to 12%. Ford continues to lead the pack in new light truck sales; however, Chevrolet and Ram are closing the gap as OEMs continue to battle over best-in-class specs and capability. Ram recently surpassed Chevrolet to gain the number two spot in sales volume with their recent redesign.



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As with most other segments, full-size pickups have been depreciating quickly as a result of the pandemic. The Black Book Monthly Retention Index for this segment fell 5.5% to 110.3 in April, the lowest level for this segment since October 2012. At that time, gas prices were over $3.00 per gallon.


Overall FPT values have trended downward since the start of the stay-at-home orders, but at a slower rate than the overall truck and SUV market average. This past week, the overall segment depreciation was –0.50%, the lowest week-over-week change since the last week of March when stay-at-home orders put everyone across the country on lockdown. Record low fuel prices and the gradual re-opening have led to the slower rate of depreciation in this segment, but newly launched incentives, along with falling consumer demand, will continue to push these values down throughout the rest of the year. Long-term, the expectation is that values will return to pre-COVID-19 levels by 2023, due to the supply shortage as a result from manufacturer production shut-downs and weaker consumer demand in 2020 / 2021.


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USED WHOLESALE PRICE PROJECTIONS

Wholesale Price Impact Under the Most-Likely Economic Scenario

Black Book’s published May Residual Values reflect a new economic reality. At the end of this month, we will release our updated residual projections for the June publish.

Short-Term Outlook (Summer / Fall of 2020)

We project a drop in wholesale prices compared to a pre-COVID-19 baseline this summer / fall as the US economy suffers through the effects of COVID-19. We anticipate an average drop in wholesale prices of 18% during the remaining months of 2020 compared to pre-COVID-19 projections: larger drop over the summer with some recovery early in 2021. We also anticipate that older (>6-year-old), cheaper vehicles in average condition will not decline as much due to increased demand for these units.

We illustrate our projections by looking at weighted average retention of all 2017 models. When comparing current projections (green line) for the summer / fall of 2020 to pre-COVID-19 projections (black line) – the average decrease in values is 18%.

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Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023) The effects of the pandemic will continue to be felt, but we project that values will return to the pre-COVID-19 baseline as used supply will decline as a result of cuts in retail and fleet sales in 2020 and 2021.

Wholesale Price Impact Under a Severe Recession Scenario

In this scenario, we project a 26% drop in wholesale prices compared to a pre-COVID-19 baseline this summer / fall with a very slow beginning to recovery in 2021. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023.

RETAIL VERTICAL

Retail Prices

We continue to see decreases in retail asking prices as consumer confidence took a dip in April. We expect the retail prices to decline further as consumer demand weakens over the next several months.


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Dealers Insights

• Retail foot traffic on dealer lots has not returned to pre-COVID-19 levels, but dealers are reporting that business has gained enough momentum to send them back to the auctions for inventory. Some dealers reported a need for vehicles 2-3 weeks ago but were hesitant to start buying again too soon. This past week, the need was too great to wait any longer, and this was reflected in the increase in the sales rates we saw in the lanes.

• New and used units are in demand on retail lots right now, with the under $10,000 vehicles continuing to dominate the demand on the used side and the new vehicle demand being driven by strong manufacturer incentives.

• Dealers in a strong financial position are seeing low wholesale prices as a potential investment opportunity to be able to buy low and capitalize when consumer demand fully returns.

• Low fuel prices continue to put pressure on the hybrid and EV market, along with fuel-efficient cars and crossover/SUV segments.

NEW VEHICLES SALES OUTLOOK

Our New Sales Outlook remains unchanged from last week. We anticipate a significant reduction in US new vehicle sales in 2020 (both retail and fleet sales) due to reduced consumer demand and projected increase in used vehicles supply.


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Most Likely Economic Scenario

In our base economic scenario, we assume a negative GDP growth in Q1-Q3, paired with a drop in consumer confidence by at least 30% and a jump in unemployment to at least 10%. Under such economic conditions, we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 12.7mm units.

Severe Recession Economic Scenario

In a deep economic recession scenario, we assume negative GDP growth until the second half of 2021. In this scenario, we project a 40% drop in new sales in 2020 to 10.2mm units.

Longer-Term View on New Sales


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The table to the right summarizes Black Book’s projections for new vehicle sales for the next several years under both economic scenarios.


Acquisitions By Car Rental Companies

The acquisition of vehicles by rental companies constitutes more than 10% of all new sales. It is an important part of their portfolio for many OEMs. Due to the reduction of air travel and travel in general, we anticipate a significant reduction of the rental fleet in the next several years, as illustrated in the table below. We saw the same pattern during the last great recession in 2007-2009.


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USED VEHICLE SUPPLY PROJECTIONS Black Book projects a higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors:

• Delayed lease returns resulting from lease extensions offered by OEMs • Extensive de-fleeting by rental car companies due to lack of consumer demand • Dramatic reduction in auction activities due to COVID-19 in March, April, & May


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Short Term Lease Return Projections

• Lease returns were projected to hit a record volume in 2020 • Instead, returned leased units are stacking up at auctions • Currently, manufacturers are offering and encouraging lease extensions • We believe this practice will continue for the rest of 2020 • We project at least 560k additional units in the second part of

2020 compared to the pre-COVID-19 estimates)


Rental Unit Returns

Business and leisure travel collapsed at the end of March. We expect a significant reduction in both for the rest of 2020. This puts tremendous financial pressure on rental and fleet companies to reduce their current fleet and to cut future acquisitions.

Our current view is that the larger rental fleet companies will be able to hold their vehicles longer, but most others will sell a large part of their inventory during the summer and fall months. This practice will lead to over 250,000 additional rental units hitting the wholesale market over the next 6 months. The table below shows Black Book’s projections for rental returns: lighter rectangles are pre-COVID-19 projections and the purple line shows the difference between current and pre-COVID-19 projections.

The drop in rental returns volume will benefit the price of newer used units as supply will be limited.


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Longer Term Used Returns Projections

With the reduction in retail and fleet sales over the next several years, we project approximately 75k used units per month less in the market in 3 years compared to previously projected returns.


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About Black Book Black Book® is best known in the automotive industry for providing timely, independent and precise vehicle pricing information, and is available to industry-qualified users through online subscription products, mobile applications and licensing agreements. Since 1955 Black Book has continuously evolved to ensure that it achieves its goal of delivering mission-critical information to its customers, along with the insight necessary to successfully buy, sell, and lend. Black Book data is published daily by National Auto Research, a Hearst company, and maintains offices in Georgia as well as the Canadian Black Book in Toronto. Contact

Black Bookp. 800.554.1026e. [email protected]

COVID-19 Market Update · 2020. 5. 5. · COVID-19 Market Update 5-12-2020 SUMMARY Used vehicle values continued to depreciate during the first week of May, but at a slower rate of

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