Lower-Priced, Higher-Mileage Used Cars Still Diamond in Rough

By Richard Greene, AR NewsMagazine Editor February 07, 2008

ATLANTA — As the general economy continues to erode, Manheim's chief economist did find a significant bright spot that has major implications for used-car operations. The demand for lower-priced, higher-mileage units presently remains strong, Tom Webb pointed out in his monthly market evaluation. "Despite the overall softness in the market, lower-priced units (less than $5,000) showed no significant weakening of pricing, even with considerably higher volumes being offered," Webb explained. "Some of this strength extended up into the subprime repossession and end-of-service commercial fleet markets, which generally have average transactions prices in the $7,000 to $8,000 range," he added.

But for the most part, Webb's analysis of market conditions was rather bleak. Reflecting reduced floor traffic, lower closing rate and tighter retail financing market experienced by most dealers, wholesale used vehicle prices fell for the fourth consecutive month in January, according to Webb. The prices are on a mix, mileage and seasonally adjusted basis, he indicated. Webb reported that the Manheim Used Vehicle Value Index reading registered at 109.1 for the month, which he said represented a 3.7-percent decrease from the prior January. "Although incentive activity rose in January, and looks to increase again in February, aggregate new-vehicle inventory counts remain low," he noted. Webb pointed to several overarching economic concerns in his monthly report.

— The labor market weakened further. "Initial jobless claims surged in late January and non-farm payrolls posted their first monthly decline since August of 2003," Webb said. "Signs suggest that job growth will remain soft, at best, for several months."

— Credit conditions tightened. "It is nigh impossible to get healthy job gains as long as the credit markets continue to restrict availability," Webb explained. "Rates don't matter if it only means being turned down for a 5-percent loan rather than being turned down for 7-percent loan." Webb noted that the Federal Reserve Board's Survey of Senior Loan Officers in January revealed that more than half of all banks have tightened credit standards for prime mortgages and that more then three-fourths have tightened for non-traditional or subprime mortgages. "The net percentage of banks raising standards for consumer installment loans increased to one-third, up from one-fourth in the October survey," he said. "It was the highest percentage of banks reporting tighter consumer credit standards in more than a decade. And the tightening has also extended to commercial loans."

— New vehicle sales dropped in January, as did inventory levels. "Although the seasonally adjusted annual rate of new-vehicle sales slipped to just 15.2 million in January, production cuts continued to whittle at inventory levels," Webb observed. "Although incentive activity did (and will continue to) increase, low inventory counts mean that manufacturers have been able to target monies to specific models and/or regions of the country. "As such, the negative impact on late-model used vehicle residuals has also been selective," he added.

— All market classes of used vehicles register year-over-year price declines. "SUVs, pickups and sports cars are down the most (more than 5 percent), while compact and midsize cars are down the least (less than 2.5 percent," Webb said.