As everyone braces for a predicted second wave of COVID-19 to hit, car manufacturers, dealers, wholesalers, and others wonder what the uncertainty means for production, volume, and sales moving ahead.
We were on track to have a really great year, and then COVID-19 happened.
Black Book’s Alex Yurchenko, senior vice president of data science, and Laura Wehunt, vice president of automotive valuations, shared their insights, analyses, and predictions of what you and other automotive executives may face in the months and years ahead.
Q: Let’s start by talking about pre-COVID-19. What was this market segment like in January?
Wehunt: Let’s take a step back and talk about the months leading up to January. We had a strong market up to Q4 2019. Q4 was when we really saw the values decline. Values were at a 16.8% overall decrease for 2019 and more than 10% of that happened in Q4, so the market softened up a lot in Q4 2019.
In January, we saw an early uptick in values. During the third week of January, we saw values of compact cars hit a level that we wouldn’t usually see until early March, maybe February, in places that were experiencing warm spring weather.
That was our landscape pre-COVID-19, so we were on track to have a really great year, and then COVID-19 happened. That’s when we really saw values fall far and fast.
Yurchenko: The projections [for 2020] were relatively stable. We were seeing a slow growth. Sales and used prices were somewhat similar [in 2019] to the previous year. We work with a lot of lenders. Most were ready for a mild recession later this year  or next year. We are overdue for a mild recession.
There were not a lot of worries in the beginning. Then COVID-19 happened, and everything went out the window and all the projections changed.
Q: Was there a tipping point when you saw the market completely unravel?
Yurchenko: At the end of March, we were already aware of what was happening in China, Europe, everywhere. We actually saw wholesale prices going up the last week before shelter-in-place orders were given.
Once the shelter-in-place orders took effect, the auctions started to close down. And it wasn’t just auctions. The sales volumes dropped dramatically. At the lowest point, we saw an 80% drop in the volume of wholesale prices.
Wehunt: I would say the tipping point came when sales suddenly had to go to all-digital. Even when the first stay-at-home orders took effect, we had physical sales still going, strong prices. But when the auctions had to close or go all-digital, that was the tipping point.
Q: Was it the same for retail sales?
Wehunt: With the uncertainty, foot traffic stopped for a lot of retailers. It slowly picked back up and, in some cases, it was better than what they initially expected. But when the uncertainty grew, the foot traffic slowed for a lot of them. It was nothing like what we anticipated before all of this happened.
Yurchenko: On the used retail side, not as many people were coming in, but data showed that sales were relatively strong and most likely fueled by the stimulus checks people received. Our expectation is that any relative stability on the retail side is not going to last. The retail side will lose strength as worse economic numbers start coming in: unemployment, GDP (gross domestic product), and consumer confidence. Expect the prices on the retail side to start dropping similarly to wholesale.
Q: Things are beginning to open up. Do you think that that will help retail or wholesale?
Yurchenko: We expect the market to continue to drop. A large part of that drop is due to the economy. The last figures I saw showed April’s unemployment at 14%, and it is projected to go above 20% in May. The latest projection for the GDP annual growth rate in Q2 is -40%.
In the short term, we see the wholesale market price going down further.
The sales rate at auctions last month was much lower than usual. There is a lot of inventory sitting in auction parking lots. The same is true for rental cars — there is a lot of parked inventory. The demand for travel is also not there. How fast can these rental car companies reduce inventory to match demand? That will add extra vehicles to the market.
In the short term, our projection is the market will decline. In the longer term, in three years [most predict] the economy will mostly recover.
In the next year or two, we expect new car supplies to be much lower [due to factory closings]. Expect prices in three years to come back to where they started [in 2019].
Q: What are the takeaways for the dealerships? Is there anything they're not doing that they should be doing?
Wehunt: Making use of the new car incentives is a big thing. Now that production lines have been shut down for a couple of months, inventory is lower. I imagine new car incentives will be taken away very soon.
Q: What about used car markets?
Wehunt: Right now, the new inventory has pushed people to buy quality used vehicles. People who need cars now are very price sensitive. They are looking under the $10,000 price point. Many of those driven into the showrooms now are there due to new car incentives. As the incentives go away, CPO (certified pre-owned) vehicles are going to be in demand. Look for some great deals on lower mileage, newer units. Those will entice new car buyers.
Yurchenko: Dealers should look at the market trend often. They should be very cautious about what is coming in two to three weeks. What was true a week ago might not be true a week from now. This is a very fast-moving market. We are now doing weekly updates and referencing [that] what was true last week might not be relevant. It’s important for dealers to stay on top of the market and follow the price trends in different segments.
Q: We had begun talking a little bit about some of the smaller cars and how well they were doing. Are there any other points you’d like to mention about specific segments?
Wehunt: When we talked about sales of the smaller cars [increasing], that was during the start of the year. The interesting thing is [that segment] sells the hardest and fastest initially, but we do believe they have some type of a bottom to navigate. This past week, the values on those actually went up, just a touch.
We saw sports cars take a turn back in a positive direction. That’s another sign of a spring market.
We've seen small pickup sales increase. Used values of full-size trucks have gone down, but not by as much as other segments. We have seen increased demand on the new side.
I think a lot of that plays into the Detroit Three’s new car incentives and today’s low fuel prices. Those have driven demand for full-size trucks and full-size SUVs, and hurt compact cars and crossovers.
Q: As you look at this economy and the one in 2008, what are the major differences?
Yurchenko: It’s very, very different. Most of the projections depend on the virus itself, if and when the second wave hits, and how fast we get through this first wave. In 2008, it took a whole year to bottom out. Now we’re talking about a matter of a few months. This is a very different type of recession in terms of timing.
Another big difference is credit. In 2008, credit availability was the main driver for why people were not able to buy cars or real estate. Credit, for now, is not the main issue — it’s the unemployment numbers. They’re the highest they’ve been since the Great Depression.
Another major difference is gas prices. During the last recession, large SUVs and trucks were hit much harder than cars due to high gas prices. This time, in April and May, negative oils prices hit compact cars the hardest. Gas prices are about $2 a gallon, and under $2 in some areas. So, there are many different forces in play.
What we saw [during] last recession is the economy started to retract; manufacturers slowed production gradually, and incentives were very high for a longer time. This time, manufacturers were forced to close factories. That will help with [the ability to lessen] incentives and match new sales to demand faster.
Wehunt: A change we have seen recently is that auction houses are starting to be able to loosen restrictions. Now dealers can [sometimes] preview inventory, physically touch vehicles instead of relying on condition reports. That has led to us starting to see a change in sales conversion rates and a stability in pricing.
Q: Can you predict when sales will normalize? You had mentioned three years, earlier.
Yurchenko: For retail sales, it's probably going to take longer than three years. During the last recession, it took seven years to go back to the same new sales volume. This time, we expect a shorter trip back, but it’ll still be longer than three years.
Last year we had close to 17 million new sales. It’s going to take five years to get demand back to that level.