Are We Going to See an Early Spring Market and What Does this Mean for Sub-prime Lenders?

Last year was unprecedented for the automotive industry with the ups and downs in valuations, and so far, 2021 is shaping up to be another one for the history books. The fourth quarter of 2020 finished with values softening and showing some signs of typical seasonal behavior in the levels of declines. However, the softness experienced in Q4 wasn’t enough to offset the elevated levels of growth seen in Q3 – overall, the market saw a decline of only -2 percent for the year.

Already in 2021, it is looking as if typical seasonal valuation trends are once again not going to occur. Compact cars is one of those segments that is defying the traditional behavior as the segment began to see week-over-week increases in wholesale values during the third week of January. The traditional time for this segment to start seeing increasing values is late February at the earliest and mid-March at the latest. The compact car segment has historically been an early indicator of the Spring/tax season market demand. The available volume in the market has been limited and is expected to continue to be restricted, so dealers are starting their buying earlier than normal. This is good signal for the sub-prime market that increased loan applications are on the horizon.














The compact car segment’s price point in the used market, under $10,000, makes it a top choice for a consumer with a tax refund as a down payment. However, this does increase the risk for the sub-prime lender as the market is currently in an elevated state. This entry level car segment was one of the few to finish 2020 with double-digit depreciation, but it was still less than is seen in a normal year (-10.6 percent in 2020 vs. -17.2 percent in 2019). With the early year gains in pricing and the expectation that this is just the beginning of the increases, it is important for lenders to understand the current market environment.

The price point of the compact car segment isn’t the only one with unseasonable behavior; the sporty car segment is also seeing early year gains, after a remarkably strong 2020. The segment contains some popular models such as the Dodge Challenger, Ford Mustang, and Chevrolet Camaro. The convertible variants in this segment paired with the limited availability of AWD makes this a segment that is traditionally very reactionary to the time of year. The expectation is that the sporty car segment will see values begin to decline around Labor Day and not see an uptick until the Spring market in mid- to late-March. However, 2021 is proving to be a new trendsetter with values starting to increase at the end of January. This is on the heels of a year that finished with the segment up 4.3 percent. This does increase the risk to the lender as the current valuations are much higher than are typical for the time of year, and as the market returns to normal seasonal behavior, increased valuations open up the potential for consumers to be upside down for longer into their loan term.

Cars aren’t the only segments throwing traditional seasonality out the window. The strength of the full-size truck segment was a top story of 2020 as the segment saw values increase by 14.4 percent in Q3, followed by minimal declines in Q4 of only -3.7 percent. The overall result for 2020 was appreciation of 8.7 percent. To start 2021, values are already beginning to show signs of increasing with the rate of gains growing each week. Last year, limited new inventory due to pandemic-induced manufacturing shutdowns during the Spring was a driving factor in the strength of the used market. In Q4, new inventory levels were improving, but with each passing week in 2021 the new inventory volume projections are suggesting another year of constrained new supply. This time around, it is due to the global microchip shortage that is impacting a majority of the OEMs. The largest players in the full-size truck market are Ford, GM, and FCA and all three of these domestic producers are currently facing some type of supply chain disruption. For example, Ford announced the reduction of their F-150 production from three shifts down to one. Early estimates of the impact on the automotive industry are expected to last into the third quarter, further fueling demand for used vehicles and driving up values.

This current strength is not expected to last. As the dust settles on the pandemic, new vehicle production will eventually go back to normal and used vehicle volume will increase as repossessions resume and slowing retail demand pushes dealers to send more unwanted units to auction. Black Book residual value forecasts show that values of 2021 model year

vehicles in January 2024 are expected to be 3.5 percentage points lower than the current retention trends averaged across all vehicle models. However, this is compared to an elevated market seeing unusual strength as a result of the pandemic-induced used vehicle supply shortage caused by delays in repossessions, reduced rental fleet purchasing in 2020, and delayed lease returns. When compared to a “normal” year of 2019, the three-year projection is expected to be up roughly two percentage points. This increase is attributed to the lower levels of used vehicles that will be coming back into the market at this time due to the decreased new vehicle sales in 2020. With values in many segments at all-time highs, it is important for lenders to verify each asset, know the current market, and be prepared for value stabilization in the future.

Laura Wehunt is the vice president, Automotive Valuations at Black Book. In her role, she is responsible for leading the U.S. automotive valuations team that has combined industry experience of over 150 years. Her team works closely with Data Science in its art-and-science approach to creating our data and solutions. Wehunt started with Black Book in 2012 as a data analyst with a passion for the auto industry. She holds a bachelor's and master's degree in Applied Economics and Statistics from Clemson University and lives in northeast Georgia with her husband and daughter.