Last updated Monday, January 24, 2011

We are a couple of weeks into the new year and it looks as if things are beginning to settle down into a now familiar pattern for the used vehicle market: scarcity and strength. There was something of a build up of supply to start the year as a result of auction activity having been disrupted by the year-end holidays, but that was met with a healthy pent-up demand as dealers replenished depleted inventory.

So we expect the market, barring some unusual economic conditions or fuel price spiking, to be very similar to last year. We will not be surprised if vehicle volumes are up some in 2011, due primarily to increased new vehicle sales and trade-in volume, but we think whatever increase in supply that occurs will be will be met with an offsetting increase in demand as the economy recovers and consumers bite the bullet and replace those vehicles they have been nursing through the last couple of years. I recently read that 85% of used-car purchases are made in order to replace vehicles thought to be "no longer useable." I'm sure some of that is simply human nature rationalizing the purchase of a newer vehicle, but still, that's a huge number.

Higher Mileage Vehicles More Acceptable
One of the things we have seen happening as a result of the lengthy period of scarcity that has dominated the market in recent times has been a general change in dealers' attitudes about vehicle mileage. Many dealers have had to become more accepting of higher mileage vehicles in an effort to maintain what they consider reasonable inventory levels. There simply aren't enough "right mileage" vehicles to meet demand, so where in the past a dealer might have largely ignored vehicles with over 50,000 miles, today he may be chasing vehicles with 60,000 or 65,000 miles. It's likely that consumers have had a similar change in thinking as they have had difficulty finding those lower mileage vehicles and may have begun to recognize that the price premium they have to pay for those vehicles is questionable economics. Together with the perception (probably accurate) that vehicles are of higher quality and last longer these days, slightly higher mileage vehicles have become more saleable, both wholesale and retail.

Lower Mileage Vehicles Worth More
The fact that vehicles are scarce means that low mileage vehicles are even more scarce than usual and are therefore in even greater demand. There is still apparently a group of consumers who will pay a premium for lower mileage vehicles, and that translates directly to the wholesale market. Lower mileage vehicles have become increasingly rare, are therefore in greater demand, and have become pricier.

50% Giveback Increases to 75%
You may have noticed that we have recently increased our give-back mileage adjustment for lower mileage vehicles in response to this trend. Where we used to give back 50% of our mileage deduct amount for lower mileage vehicles, we now give back 75%.

So a $10,000 vehicle with a $100 deduct for every thousand miles over 50K would formerly have had a GIVE BACK amount of $50 for every thousand miles LESS than 50K. On this same vehicle we now give back $75 for every thousand less than 50K. If it had only 30,000 miles (20,000 to the good) the previous give back would have been $1,000 but now that increases to $1500. We have included information about this change in our printed books and of course, users of or our other electronic versions have these calculations made automatically for them.

We expect the overall market to continue to be steady and quite strong as we move into spring, fueled by a continued relative scarcity of product and increasingly heightened retail demand.

Dan Galves