An excerpt from this month's Industry Brief's Q&A
I hear a lot of discussion about used vehicle pricing bumping up against new vehicle prices. What’s your take?
Well, certainly new vehicle prices impose a ceiling on how much late-model used vehicle values can rise. But, it is not a rigid ceiling – it contains many contours and is not easily measured. And, it is important to remember that both the new and used vehicle retail markets are monthly payment driven. Actual sale prices are less important. If, for example, a captive finance company offers a no money down $199 a month lease deal on a new vehicle to customers with less than stellar FICO scores, that will pretty much make a same make late-model used vehicle “sale-proof”.
With that in mind, presented below is the ratio of a computed dollar amount that stands behind the new vehicle CPI (a mix, quality, and seasonally adjusted series of transactions prices net of incentives) versus the Manheim Index (which is mix, mileage and seasonally adjusted) with a three and one-half year lag. This could loosely be considered a residual.
Two things are striking. First, this measure of residuals is much more stable than many would have suspected. And, second, we are currently at a high ratio of used vehicle prices to new vehicle prices. But that should be put into perspective. The new vehicle CPI is quality adjusted whereas the Manheim Index is not. Thus, over time, there should be an upward drift in the ratio. And, more important, is that issue of relative monthly payments. Given that new vehicle inventories remain in check, manufacturers have not been overly aggressive with direct incentives or subvented lease deals. As such, there have not been as many abnormal disruptions in the balance between new and used vehicle monthly payments. We see this new vehicle inventory discipline being maintained and, thus, see no reason why used vehicle values can not maintain their current levels.