FIRSTLOOK MARKET ALERT COVID-19 Impact #2 · the coming months. Moderate Recession: With over 30...

FIRSTLOOK MARKET ALERTCOVID-19 Impact #2

MAKERS OF

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Covid-19

Disruptive economic shocks like the one we are in bring tremendous risks along with ample opportunities. While the current disruption is greater than 9/11 or the Global Financial Crisis of 2008 combined, there are lessons to learn. During those prior crises, the first shock, a period of demand freeze was followed by a second shock of a sharp drop in consumer confidence. Eventually, shifts in supply and demand curves caused the pre-owned values to crash costing finance companies and dealers billions of dollars.

This time is also different. The economic paralysis from the COVID-19 lockdowns has damaged consumer confidence and combined with record off-lease supply and new car incentives creating a “perfect storm” hitting dealerships.

Industry analysts have coalesced around three economic scenarios:

FIRSTLOOK MARKET ALERT Covid-19 IMPACT #2

We have seen this before:

A “V”-shaped recovery with prices for one-to-six-year old pre-owned cars declining 10%-12%.

Mild Recession:

A recovery with prices declining 14%-17% over the coming months.

Moderate Recession:

With over 30 million Americans having filed for unemployment (a level not seen since the Great Depression) the chance of severe recession and a slow, “U”-shaped recovery, with 22%-25% declines in pre-owned prices, cannot be dismissed.

Severe Recession:

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Covid-19FIRSTLOOK MARKET ALERT Covid-19 IMPACT #2

• Beware of the “Trade-In Overpayment Zone” while the gap between retail and wholesale prices remains large.• Take advantage of the “Retail Out Zone” available now to retail aggressively out of pre-crisis inventory where F&I profit can help offset your loss on the vehicle.• Run lean until prices correct and the “Restocking Zone” window opens.

How can you safely navigate through this Perfect Storm?

There is unprecedented supply pressure driven by record off-lease maturities of nearly 4.1 million units in 2020 (60% more than 2015) and massive liquidations of rental car inventories. There are 1.8 million additional units due off lease between March and July alone. Managers of off-lease portfolios are letting inventory pile up at auctions (with over 800,000 overflow units reported on auction lots). In past crises, this has led to crashes in vehicle values once this logjam breaks. Any wholesale price drops before this happens are a “mirage” not an opportunity.

Storm Front #1 Record Off-Lease Supply:

The demand freeze took hold quickly as the shelter-in-place orders spread. Consumer confidence will fall further due to economic uncertainty from unprecedented unemployment. Retail pricing has not yet corrected significantly.

storm Front #2 Damaged Consumer Confidence:

OEM incentives spark new car buying, while further depressing used car values, especially one-to-three-year old pre-owned cars.Storm Front #3 New Car Incentives:

Three forces are converging to create a perfect storm that will swamp the values of pre-owned inventory, creating the risk of massive losses from current inventory while ultimately creating incredible profit-making opportunities:

A Perfect Storm is Building:

Mild Recession: -12%

Moderate Recession: -17%

Severe Recession: -25%

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Covid-19Covid-19FIRSTLOOK MARKET ALERT Covid-19 IMPACT #2

Even at the individual vehicle level, there are few vehicles that are ready for repurchase profitably. Most vehicle level pricing alerts in our system are indicating between $1,200 and $5,500 in reductions still to come. At any price above the expected future value dealerships are taking on additional risk of loss.

Remain flexible as conditions change. Keep an eye on the auctions, changing new car incentives and new car days supply for manufacturers with extended factory closures. You still have to put deals together and may not be able to wait for ideal conditions to buy. Regions vary significantly. When appraising, educate your customers and beware of giving back your new car profit by taking in underwater trade-ins. You know your market and customers better than anyone. Remain disciplined and use all the market data available, paired with your sales data and local understanding to help your dealership perform well in this challenging market.

The aggregated data here shows actual and projected pricing changes by key vehicle segment and brand at the national level. This category level information can be helpful in projecting how far the individual segments have progressed across the economic shock, reset and recovery cycle, but your local market conditions may be different.

In addition to the information contained here, MAX Digital is providing actionable vehicle level detail with new Pricing Alerts, giving clients the decision-making data within the FirstLook interface for pricing and valuation activity. Those alerts indicate the expected national price in the coming months, so that each vehicle level decision can take into account projections of expected future market values.

Contact us at [email protected] to get your Pricing Alerts turned on within FirstLook.

The Path Ahead:

Once the major off-lease backlog begins to work its way through auctions at low no-sale rates, prices

catch a falling knife – wait for prices to correct before restocking. At the same time, keep an eye on new vehicle days supply, especially for trucks, for manufacturers with closed factories. These are the only vehicles likely to beat the price trends above.

When is safe to restock?

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Actual Market Change in Retail Automotive Market Prices between March 1, 2020 and May 7, 2020, as well as Projected Change in Mild, Moderate, or Severe Recession Scenarios

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Compact SedanVehicle Recession Recession Recession


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mid-size Luxury sedan


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compact luxury Hatchback


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mid-size coupeVehicle Recession Recession Recession


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FIRSTLOOK MARKET ALERT COVID-19 Impact #2 · the coming months. Moderate Recession: With over 30...

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