Some See a Ongoing Rise in Used Car Values, Some Big Lenders Disagree

DETROIT––Not everyone agrees with those analysts who are forecasting used car values and demand for loans will continue to rise in 2021. In fact, Ally Financial said last week that it is embedding a potential 15% to 20% cumulative decline in used-auto values by the end of 2023 into its assumptions, the Wall Street Journal reported.

“It is natural for lenders and investors to anticipate the end of the current used-vehicle boom, and valuations of banks with big auto-finance businesses seem to partly reflect that,” the Journal reported. “Lenders such as Ally and Capital One Financial are trading at forward price-to-earnings valuations that are relatively low compared with where they normally trade versus S&P 500 banks overall, according to FactSet data.”

The Journal report noted that industry-tracker Cox Automotive has forecast that the Manheim index of used-car prices will be a mere 3% lower by this December than it was in December 2021.

“Perhaps a price decline could accelerate quickly the following year,” the Journal stated. “For the time being, though, things like the supply-chain snarls for chips that are making new cars take longer to build still appear to be a factor. Ally said that, although it is forecasting cautiously, ‘recent trends indicate ongoing resilience’ in used values.”

Tight Inventory

Despite high used-car prices, strong demand and tight inventory at auto dealers, the Journal reported that Ally and Huntington Bancshares both noted upticks in dealer credit utilization in their quarterly updates, “indicative of needing to finance inventory that isn’t instantly moving off the showroom floor. More new cars on lots might lead to fewer buyers winding up in the used-car market.”

Both General Motors and Ford Motor have also steered a way into the used car market via online platforms, the Journal added.

62% of Leases Bought Out

“That same trend of scarce inventory has also likely played a role in more vehicles being bought out at the end of leases—meaning that a lease financing provider isn’t able to take an off-lease car and sell it into the hot market,” the Journal added. “Ally reported that 62% of leases were bought out in 2021, compared with a figure typically closer to 30%, muting lenders’ upside to rising used values to a degree. Falling used-car prices would reduce the gains on selling cars, but they also could lead to more cars winding up in lenders’ hands in the first place.”