What Can We Expect From Used Car Sales in Q2? Jonathan Banks from J.D. Power Provides Insight

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The used car market has had its fair share of turns and changing trends so far in 2019 and Jonathon Banks, Vice President and General Manager for Vehicle Valuations at J.D. Power, suspects that this won’t be the end of the surprises 2019 has in store for dealerships. Banks sits down with CBT News’ Jim Fitzpatrick to discuss the latest update on inventory and auction volume of used cars as we begin to move into the second quarter. Check out the full interview above to see what seems to be in store for dealerships and the used car market for the remainder of 2019.

VIDEO TRANSCRIPT: 

Speaker 1:
From our studios in Atlanta, this is Car Biz Today. And here now, Jim Fitzpatrick.

Jim Fitzpatrick:
Hello everyone, I’m Jim Fitzpatrick, thanks so much for joining us on CBT News. 2019 may have gotten off to a sluggish start for the used car market, but bounced back strong this spring. Will it continue to grow, or cool off?

Jim Fitzpatrick:
Here to give us an update on inventory and auction volume as we settle in to Q2 is Jonathan Banks, vice president and general manager for vehicle evaluations at J.D. Power.

Jim Fitzpatrick:
Welcome back to CBT, Jonathan.

Jonathan Banks:
Yeah, thanks a lot. Glad to be here.

Jim Fitzpatrick:
Sure. So, talk to us. Let’s jump right in here. What’s your take on the overall health of the auto industry so far this year?

Jonathan Banks:
The overall health of the auto industry is fantastic. I really focus on the u side which is just becoming really the bellwether of positive results. We’re seeing really strong demand which is driving up prices in the retail side. We look at the wholesale market. Dealers are paying more for the inventory that’s a bit of a challenge. But the good part about it, they’re paying more on the wholesale, but they’re getting that back on retail.

Jonathan Banks:
On the new vehicle side, we’re seeing a bit of a pullback on retail sales, but when you really dig down underneath that data, we see some strength in the form of, we’re seeing transaction prices on new vehicles go up. A lot of that’s coming from lowering incentives, but also coming from more just higher prices on vehicles because of contenting.

Jonathan Banks:
Overall, the market looks really strong.

Jim Fitzpatrick:
Yeah, that’s for sure, and I guess everybody still wants SUVs and truck, right? I mean that’s the name of the game today.

Jonathan Banks:
Yeah, on the new side, especially, we’re seeing a big decline in car sales and a big uptick on SUV and truck sales. The used market’s a little bit different. We’re seeing the supply of SUVs and trucks start to increase as a percentage of the total used supply. It means that the availability of SUVs and trucks is getting better, relative to cars. But, the car volume is still really high, and what we’re seeing on the used side is that car prices have been going up faster than SUV and truck prices, surprisingly. Even though the supply is going down a little bit, but the sheer volume of mid-size cars is one of the highest volume segments in the used market. And, prices are still going up.

Jonathan Banks:
We’re seeing there’s a big pullback in demand on the new side, but we’re seeing a strong demand for cars on the used side. Now it’s happening for both SUVs, trucks, and cars, but we’re seeing prices for cars actually, from on a percentage basis, increasing faster than trucks and SUVs.

Jim Fitzpatrick:
Why do you think that is on the used side versus new?

Jonathan Banks:
Yeah, we have a couple theories. One is affordability. One of the downsides of prices going up in the new market is there’s a lot of consumers out there that probably can’t afford those higher new vehicle prices, so they’re going to the used market. The good thing about the used market is the quality of vehicles is so good now. Manufacturers just keep building better and better cars, so the quality is great.

Jonathan Banks:
And, the other thing that’s happening that’s really great is the content on those used cars is also increasing. You’re getting a high quality, really a late model car usually, zero to five years old, so not that old, good quality, good content, and much more affordable than buying a new car. As a matter of fact, the used car on average is somewhere around 30% less than what you’d pay for a new car, and payments about 20% less.

Jonathan Banks:
We think it’s an affordability thing and that’s driving a lot of, let’s just say either young consumers or consumers who are just feeling more confident about their job to get into a new vehicle, a new vehicle being a used vehicle, of course, and looking for affordability. The car segment still offers more affordability than trucks and SUVs.

Jim Fitzpatrick:
Right. And maybe the new, I shouldn’t say the new generations, but the millennials and the Generation Zs are focused even more on the environment and they say, “What do we need this huge, big SUV or van? We don’t have a big family, there’s no absolute need for it. We just gotta get from point A to point B.” Some of them were coming out of using ride share providers, right. They might look at transportation completely different.

Jonathan Banks:
Yeah, that’s a great point. I mean we’re in a “subscription economy,” people say. When you think about subscriptions what you’re really talking about is affordability, I think, because you’re talking about a payment. Affordability ,and to your point, environmental, when you look at all the surveys for the younger generation, environment is an important thing for them. And, also just making a rational, value-based purchase is more important to this generation than prior generations. To me, it all points to cars seem like a good choice.

Jonathan Banks:
The other thing we didn’t talk about that I think is important, as well, you think about the demand that is being driven. Everyone talks about how ride sharing is going to hurt the industry. Well, if you think about ride sharing, what you’re thinking about is a more utilization of a vehicle, right. We drive the vehicle, it sits in the garage for eight hours while we’re at work. An Uber driver is driving that vehicle five or six, seven, eight hours a day, so I’ve got to imagine a lot of Uber drivers are going to want to get affordable vehicles as well. I see that as being a really good demand for used vehicles, as well, especially for smaller cars.

Jim Fitzpatrick:
Wow, that’s a very good point. I didn’t think about that, but I think you’re on to something with that. Discuss the overall trend predictions, of used cars, for the next three to five years for the dealers and managers that are watching today.

Jonathan Banks:
Okay, on the wholesale market, we’re expecting this year to be pretty flat compared to 2018. If you’re a dealer, whatever strategy you were doing on the wholesale side, you probably can implement the same strategy as ’18. I think the dealers maybe didn’t catch on to the demand of the car segment, and I’m sure they’re very aware of it now. Definitely capitalize on all the opportunities with every segment.

Jonathan Banks:
It appears, from our data, that the young buyers as I mentioned before, are interested in the car segment, so be sure to have good inventory that’s affordable. Make sure those options align with all the different consumer demographics you’re going to get, so obviously if you want to target a Gen Z, make sure your car has something as simple as Bluetooth. And, safety also seems like a very important factor in purchase decisions as well.

Jonathan Banks:
To us, getting the right mix is very, very important. Expect prices to remain pretty high on the wholesale side. The retail market still seems strong, too, so understand your market, get the pricing out there that’s right, you should be able to keep your margins pretty well without having to discount very much, especially if you’re really using a lot the data available to get the right vehicles.

Jonathan Banks:
Moving out a few years, we do expect some softening, although the market is proving us wrong as it did in ’18 and ’19, too. But, we expect some softening in the next couple years, not much. We’re thinking by 2021, you’re looking at maybe a two to three percent decline in prices, where you’re going to see more of a decline on SUVs and trucks, just because of the sheer amount of supply coming back to market. We think the car segments are going to remain pretty flat. And the luxury, especially cross-over segments are going to have downward pressure, and that’s really has a lot to do with supply as well.

Jim Fitzpatrick:
In terms of companies, like you had mentioned on the subscription side, talk to us about the broader scope of the growth in buying alternatives such as Carvana, and subscription services, ride sharing, and such. Lyft had a weak IPO, but talk to us about the impact that all of that will have.

Jonathan Banks:
Well, we think that’s another driver of the high used prices that we’re seeing. When you start looking at all these innovation solutions, they’re all buying inventory and they’re thinking about creative ways to get that inventory into the market quicker. We look at it as, “Hey, innovation is coming.”

Jonathan Banks:
You look at what AutoNation is doing with partnering with a lot of these innovation solutions, I think that’s probably the right way to go. If you’re a smaller dealer and you can’t do that investment, I think it’s just a matter of looking at the market, looking at what these innovative solutions are doing that’s creating that pull for consumers. Figure out ways that you can emulate some of those strategies.

Jonathan Banks:
You don’t need to become a Carvana with a vending machine, but make the purchase easy. That’s really what we’re talking about. Streamline that purchase, recognize that your consumers are going to do a lot of online research and respect that, and be ready to have a dialogue knowing that your consumer is going to have a lot of information about the vehicle that they’re coming in to look it. I think that’s really the key.

Jonathan Banks:
I like all these new solutions. I know it makes the playing field pretty bloody from a retailer standpoint, but overall, I think the market is proving that we have room for it with demand. And, I think it’s just a matter of innovate, innovate, innovate. Use data and think about how you can make that process for the consumers as frictionless as possible. The great thing about it, is the dealers have an advantage, I think still, because they’re full service. They get the customer for everything, repairs, they’re still looked at as being an authoritative person to talk to about vehicles. I think it’s an opportunity for dealers just to do what they’ve always been doing and just really hone in on that customer service experience, but recognizing the digital aspect that the consumer has journeyed to find the vehicle.

Jim Fitzpatrick:
Absolutely, Jonathan Banks says “The used car industry is looking good” for you dealers out there. Prepare for it. Get ready. And, things are going to be good, right. So, Jonathan Banks, vice president and general manager for vehicle valuations at J.D. Power, thank you so much for joining us on CBT news.

Speaker 1:
CBT automotive network, the number one, most-watched network in retail automotive. CBT is a part of the JBF Business Media family.

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