This year's trend heartens auto makers, dealers that were bracing for a collapse
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 14, 2017).
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Used-car prices have held up this year, defying predictions. That is bad news for shoppers, but the trend is helping buoy the outlook for auto makers, dealers and rental-car companies.
Prices of used cars were expected to plummet starting in 2017 as millions of vehicle leases expired and people who bought following the financial crisis exchanged their old rides for new ones. Softening prices in the preowned market can force auto companies to offer customers richer incentives or extend deeper discounts on new cars, resulting in lower margins on fresh models rolling out of factories.
But the predicted price collapse hasn't happened, and now there is optimism that the swell of vehicles that will hit the used market may not be as problematic for new-car sales as initially feared.
The number of lease returns is expected to reach 11.3 million in the three years ending in 2019, 49% more than the same three-year period that ended in 2016, according to research firm J.D. Power.
Thus far, the market is absorbing the extra supply thanks to tighter inventory controls by various industry players and the loss of as many as a half-million cars to hurricanes in Texas and Florida.
Manheim, an auction company tracking prices, said the average used vehicle wholesaled for $13,599 in October, representing a record transaction price that is 8.1% higher than the same month a year ago. That price is adjusted for seasonal factors and partially reflects increased demand for pricier pickups and SUVs, while prices for passenger cars have declined.
Black Book, a used-car tracking publication owned by Hearst Business Media Corp., said used-vehicle depreciation has worsened because more cars are hitting the market, but the impact on prices hasn't been as bad as expected. Black Book vehicle depreciation has grown 1.5% in 2017, far behind the 6% rate initially forecast.
Auto makers watch these numbers so they can set resale values for leases that now represent about a third of new-car sales. Used prices also help determine the level of discounts or rebates needed to persuade a person to choose a new car over used.
Ford Motor Co. late last year warned falling used-car prices would shave $300 million from full-year operating profit but backed off the gloomy outlook last month.
"We're not seeing the decline to be as precipitous as we thought" on used vehicles, Ford Motor finance chief Bob Shanks said on a conference call last month. That "should make it a bit easier for us to do better in terms of new vehicle prices."
Demand from buyers replacing hundreds of thousands of storm-damaged vehicles in the wake of Hurricanes Harvey and Irma in September helped boost used-car values. Barclays Capital analyst Brian Johnson said in a research note in early November that it won't last: "We expect used car pricing...to turn negative in the coming months as hurricane benefits dissipate."
Others say concerns about replacement demand drying up are assuaged by the longer-term trend, with price increases being reported in nine of the 10 months of 2017, according to Manheim. This year's gains more than reverse declines reported over the course of 2016.
Inventory-management strategies are driving the longer-term trend. Dealers and rental-car agencies, which sell a substantial portion of the 40 million used cars exchanging hands annually in the U.S., are often relying less on industry auctions to unload gently used cars. Instead, they are reselling them through strategic marketing efforts, such as "certified preowned" vehicles on a dealership lot or a rental-car company's own retail network.
Sales of certified preowned vehicles, which are refurbished and certified by the dealer or manufacturer, were up 1% through September, according to data from trade publication Automotive News.
Kathryn Marinello, chief executive of Hertz Global Holdings Inc., said Friday the company is "being smart about how we sell" vehicles coming out of daily-rental service. Much like rival Avis Budget Group Inc., Hertz is backing away from auctions, with 81% of its vehicles sold in the third quarter through dealerships or its own stores, up from 72% and 60% in the prior two quarters respectively.
The company also is renting vehicles to Uber and Lyft drivers, a strategy that is keeping the automobiles in service longer, Ms. Marinello said. Hertz spent the first half of the year refreshing its vehicle fleet to include more SUVs and features that buyers will want, which should make it easier to unload those vehicles when they come out of service.
In addition, domestic auto makers are no longer dumping unwanted cars on rental lots.
"All of the Big 3 Detroit OEMs have gotten much more disciplined about both the quality of the cars they put out into the rental fleets and quantity. I do think that's having a positive impact on the residual values," Ms. Marinello said.
For these reasons, Hertz expects only a 2% decline in used-car prices in 2018.
Buoyant used-car prices would help dealership groups, because used cars tend to deliver bigger profit margins than new vehicles.
Morgan Stanley analyst Adam Jonas said in an August research note that the stabilization of prices helped stem "negativity on used cars" among auto-sector investors.
Miles Thompson, general manager at Thompson Buick-GMC in Springfield, Mo., said used-vehicle prices have remained stubbornly high, especially on popular trucks. He buys between 100 and 200 used vehicles a month from auctions to stock the dealership's preowned lot.
"People thought the bottom would drop out. That hasn't happened," Mr. Thompson said.
Write to Mike Colias at Mike.Colias@wsj.com
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November 14, 2017 02:47 ET (07:47 GMT)