Dealers Sell Down Used Inventory while Rental and Lease Supply Deferred Through June

An auction market depressed by the COVID-19 pandemic combined with much better used retail sales activity is allowing dealers to sell down used vehicle inventory.

The bulk of deferred rental and lease volume -- and volume associated with reductions in rental fleet sizes that will be necessary to satisfy projected utilization levels post-COVID -- will peak in June.

"The pandemic has severely disrupted the expected inflow of rental, lease and trade-in volume," says Jonathan Banks, VP Vehicle Valuations & Analytics, Valuation Services, J.D. Power. "As a result, the majority of supply expected in March and April from maturing leases and returning rental units will be remarketed by the end of June."

Rental, Lease and Trade-in Supply -- J.D. Power

Prior to the COVID-19 pandemic, J.D. Power expected rental, lease and trade-in volume to average 1.25 million units per month in the March-June timeframe. The adjusted projections call for an average of just more than 1 million units per month to enter the used market during that period.

Not the glut that is being feared

J.D. Power estimates that around 480,000 rental and lease return and trade-in units were removed or deferred from the market in March, relative to the pre-virus outlook, and expects that an additional 557,000 units will be removed or deferred in April vs. its pre-virus expectations.

While deferred rental and lease volume--along with increased volume related to rental fleet reductions--expected to return to the market in large quantities in May and June, J.D. Power expects the supply infusion to be offset by a significant decline in trade-ins through May.

"This will lead to a roughly 63,000-unit reduction in volume in May, compared with our pre-virus expectations," explains Banks. "Supply expected in June will be 160,000 units above our pre-virus forecast. By August, supply will likely settle around the pre-virus levels we were observing in February of this year."

While wholesale auction activity remains well below average, sales are moving in a positive direction as auction houses open, focusing entirely on simulcast sales. Wholesale auction sales reached nearly 28,000 units the week ending April 19, a 19% lift over the prior week's 23,500 units. Volume over the first three weeks of April was 80% below April 2019 and 78% lower than the pre-virus forecast.

In the meantime, retail sales of used vehicles were just under 400,000 units through the four weeks ending April 19, as wholesale auction sales reached just 93,000 units. To put this in perspective, prior to the COVID-19 pandemic, there were approximately two used retail sales at franchise dealers for every auction sale. Since the week ending March 29, the ratio is more than four used retail sales per auction sale.

Used wholesale losses improve, while retail prices remain relatively strong

As wholesale volumes increased, auction prices fell once again for the week ending April 19. However, the degree of decline slowed to 1.6% from 2.3% for the week ending April 12.

"The improvement in rate of decline is a positive indicator, but the wholesale auction market has a long way to go before resembling anything close to normal," notes Banks.

Used retail prices continue to be relatively strong with consumers paying amounts only modestly below pre-virus levels. Retail prices have only fallen an average of 0.5% on a weekly basis during the past three weeks. Prices are down 2% vs. the beginning of March.

(To read the entire COVID-19 Valuation Services Update from J.D. Power visit: https://bit.ly/3eNsg4q)