Influx of Late-Model Used Cars Projected
22 October 1998
Influx of Late-Model Used Cars Projected; New and Used Vehicle Prices to Feel Impact
Polk Research Also Shows Buyers' Market will Prevail Through 1999
DETROIT, Oct. 22 -- Recent analysis by The Polk Company
shows that the supply of late-model used cars will continue to increase over
the next three years, affecting both pricing and demand for new and used
vehicles.
Polk's statistics indicate the number of off-lease and rental vehicles
returning to market will increase by nearly 400,000 units between now and the
year 2000. Of these, 62% will be off-lease vehicles, and nearly 96% of these
will be between two and four years old. As a result, off-lease vehicles'
share of the current to five-year-old used-car market will increase from an
estimated 25.5% in 1998 to an estimated 27.6% in the year 2000, based on
historical lease term patterns (Charts A & B).
Personal registration vehicles returning to market are projected to drop
by 452,000 units, and the balance -- other than lease/rental -- by 17,000
units between now and the year 2000. Most of these vehicles are returned at
four and five years old. The total number of current through five-year-old
vehicles returning to market is therefore expected to decrease by 83,000 units
over the period, making the growing concentration on two- and three-year-old
used vehicles available even more noticeable (Chart C).
"Leasing has grown from 18.3% to 25.5% of all registrations over the past
three years," said Richard Spitzer, director of industry analysis for Polk.
"Combined with the overwhelming majority of leases being two- and three-year
terms, this means we will be seeing continued growth in both the number and
importance of off-lease vehicles to the used car market for at least the next
few years.
"The implications could be far-reaching," added Spitzer. "If an
oversupply of a given-age vehicle hits the market, and prices for that model
year drop, prices for all vehicles -- new and used -- will be affected."
Sales of two-, three-, and four-year-old cars represent a growing portion of
the used car market, accounting for 20.2% of sales in 1997 versus 17.5% in
1995 (Chart D). As a result, their residuals have been under pressure;
perceived value being the surest means to attract enough buyers to absorb the
increased supply. The pattern of sales reported varies greatly from the
traditional share-of-market expected for each vintage. Chart "E" shows a
comparison between this trading trend and the natural, or expected, demand
curve. (See editor's note.)
"What we have seen is a dramatic change in the number of late-model used
vehicles traded," said Spitzer. "This has created a large gap between the
natural demand curve and the used-car sales curve. The distance between the
two defines the number of buyers that had to be attracted in order to sell the
available supply of vehicles. Since, by and large, perceived value is the key
motivation for consumers, the difference between the curves also measures the
amount of price pressure -- a proxy for residual risk," he added.
At the same time, Polk data indicates that the increased supply of
desirable used vehicles and the moderating prices for all vehicles are
encouraging consumers to trade up. The trading rate, as measured by the
turnover in used vehicles compared to the total number of vehicles on the
road, has increased from 17.6% in 1994 to 19.1% in 1997 (Chart F). Polk
recently reported that the total number of vehicles on the road set a new
milestone in 1997 when it passed the 200 million unit mark for the first time.
The total used car market has grown as a result, averaging 4.7% annual growth
over the last three years.
"The good news is that a growing number of vehicles on the road trading
faster suggests that used-car market demand could increase by 1.5 million
units annually through the year 2000," said Spitzer. "The bad news is that
the supply of late-model, low-mileage vehicles will exceed 'natural' demand,
as will two- and three-year old vehicles to an even greater degree."
Supply of current to five-year-old vehicles returning to market is
expected to remain at close to 12.5 million units per year between now and the
year 2000, while the natural demand curve suggests that demand should be in
the 8.9 million unit range over the same period. These numbers imply a
potential surplus of more than 3.5 million vehicles (Chart G).
Because of leasing penetration, some segments will see more pressure than
others. Both the luxury and sport utility categories, which currently share
the highest leasing rates, will see the largest increase of late-model
vehicles returned to market.
"The inevitable conclusion is that the looming supply/demand imbalance
will continue to put pressure on used-car prices," said Spitzer. "The only
way to combat the trend is for the timing of returns to be aggressively
managed. The book of new business is going to have to be balanced to
approximate natural used-car demand in order to lessen the impact."
Polk provides multi-dimensional intelligence information solutions to
companies as a statistician for the motor vehicle industry; as a direct-
marketing resource; as a supplier of demographic and lifestyle data and
database-marketing services; as a publisher of city directories; and as a data
enabler for geographic information systems. Polk is a privately held firm
with facilities around the world, including the United States, Canada,
England, Germany, and Costa Rica.
Chart A
OFF-LEASE SHARE OF MARKET
0 - 5 Years Old
Year Lease Forecast Total
1998 3,187 12,520 25.5%
1999 3,263 12,463 26.2%
2000 3,428 12,437 27.6%
Change 1998-2000 241 -83
Source: Polk
Note: All numbers in 000's.
Chart B
LEASE RETURN PATTERN
AGE CY98 CY99 CY00
Current 0.0% 0.0% 0.0%
1 Year 1.0% 0.9% 1.0%
2 Years 46.7% 42.1% 26.5%
3 Years 40.0% 43.3% 49.0%
4 Years 9.7% 10.0% 19.9%
5 Years 2.6% 3.7% 3.5%
Total 100% 100% 100%
2- to 4-Year-Old Total 96.4% 95.4% 95.5%
Source: Polk
Chart C
LEASE TERM PATTERNS
Supply Forecast Number Traded By Category
(5 Most Recent MY) Personal Lease Rental Other Total
1998 6,945 3,187 1,632 755 12,520
1999 6,778 3,263 1,671 750 12,463
2000 6,493 3,428 1,777 738 12,437
Change 1998-2000 -452 241 145 -17 -83
Source: Polk
Note: All numbers in 000's.
Chart D
USED CAR MARKET BY AGE
1995 1996 1997 Change 95-97
Total Used* 33.77 35.16 36.79 9.0%
Age 2-4 17.5% 18.5% 20.2% 15.3%
Age 5-10 39.3% 37.8% 35.3% -10.1%
Age 11-14 15.9% 17.8% 20.3% 27.3%
Source: Polk
(*In Millions)
Chart E
See Note to Editors
Chart F
USED CAR MARKET PROJECTION
Year VIO Turnover Used (Est.) Mkt. Growth
1994 182,328 17.6% 32.07 -
1995 186,701 18.1% 33.77 1.70
1996 191,134 18.4% 35.16 1.39
1997 193,091 19.1% 36.79 1.63
1998* 196,072 19.5% 38.31 1.52
1999* 199,039 20.0% 39.87 1.55
2000* 201,789 20.5% 41.40 1.54
Note: All numbers in millions. VIO includes cars and light trucks.
* represents trend projections
Source: Polk
Chart G
USED CARS (0 - 5 YEARS OLD)
Year Expected
Demand Expected Supply Balance
1998 8,993,746 12,519,758 3,526,012
1999 8,939,623 12,463,312 3,523,689
2000 8,915,318 12,436,620 3,521,302
Note: Expected Demand is natural turnover times VIO.
Expected Supply based on Return-to-Market Table.
Source: Polk