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Wholesale Prices Retreat in May

After a rise in April, the Manheim Used Vehicle Value Index moved down again in May. Wholesale used vehicle prices (on a mix, mileage, and seasonally adjusted basis) have now fallen in seven of the past eight months, resulting in a year-over-year decline of 6.3%.

Given the continued deterioration in the economic environment and the significant falloff in consumer confidence, the pressure on wholesale vehicle values has come as no surprise. May’s record rise in gasoline prices further widened the spread in price performance between various vehicle market classes.

Consumer confidence collapses. Declining employment, falling home values, and rising food and energy prices have put consumers in a funk. The Conference Board’s measure of consumer confidence fell to its lowest level in 16 years in May. The University of Michigan’s measure fell to the lowest level in 28 years. The correlation between consumer confidence measures and actual consumer behavior has generally been tenuous, but shifts of this magnitude can not be easily dismissed. Indeed, the measured change in consumer attitudes has already been reinforced by actual shopping patterns. Although April retail sales were fairly good, May promises to be a letdown as expenditures on consumer electronics, casual dining, and low-end used vehicles all failed to benefit as much as expected from the economic stimulus checks.

Credit conditions continue to constrain consumers. For those consumers still willing to buy, lenders are making it increasingly difficult. The Federal Reserve Board’s April survey of bank loan officers showed no slowdown in the rate at which lenders are tightening credit. This was true whether borrowing was for equity lines, credit cards, commercial, residential, or consumer loans.

For non-credit card consumer loans, a record 44% of banks reported a tightening in lending standards over the past three months. That tightening came in one or more of the following ways:

• 41% widened the spread between their cost of funds and loan rates;
• 37% demanded higher consumer credit scores;
• 35% reported an increase in their turndown rates;
• 27% required larger downpayments; and,
• 9% lowered the maximum maturities of their loans.

The tightening of auto lending standards has been even more dramatic for non-bank lenders because they are more dependent on the asset-backed security market as a source of funds. On a positive note, however, investors in late May bid aggressively for the bonds backed by AmeriCredit’s subprime auto loans. In fact, the securitization was upsized from $500 million to $750 million. This was an important development since many analysts were viewing the AmeriCredit offering as a litmus test for the risk appetite of the market. As it turned out, it was the first successful subprime securitization of the year.

Lower new vehicle sales and narrower used vehicle margins. New vehicle sales, which were dismal in April, continued to weaken in May. Even more troubling for dealers has been the dramatic shift in customer preference away from large vehicles as this has created significant inventory mix problems. On the used vehicle side, dealer gross margins continued to erode. On a sales-weighted basis, the average retail used vehicle margin for the seven publicly traded dealership groups declined to 10.0% in the first quarter of 2008 versus 10.8% in the first quarter of 2007.

Gas prices drive used vehicle valuations by market class. Continued increases in gasoline prices (and little clarity as to where the peak may be), pushed prices for both fullsize SUVs and large pickups sharply lower in May. Wholesale prices for large pickups, already hammered by fuel costs and a shrinking construction industry, were driven even lower by higher new vehicle inventory levels in that segment and the corresponding increase in incentives.