866.975.6232 | nada.com/b2b866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used

Vehicle Prices

AT A GLANCE

When to expect an increase in used supply

Recent trends in new vehicle sales

Changes in used supply by vehicle segment

A large SUV used price study

A used vehicle price forecast for 2012

866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used Vehicle Prices

2

The Recession’s Impact on Used Vehicle Supply and PricesAlthough the Great Recession ended more than two years ago, the economic repercussions live on — especially in the automotive sector.

From 2000 to 2007 — the eight years leading up to the recession — new vehicle sales averaged nearly 17 million units per year. Since the recovery began its slow climb in 2009, new sales have averaged just 12 million units per year. That’s 29 percent lower than the pre-recession level.

This backslide in new vehicle sales has impacted used vehicle supply, since the number of late-model used vehicles on the market depends on new vehicle sales. In fact, NADA estimates that the supply of used vehicles ranging up to five years in age has dropped every year since 2009 — and that supply through 2011 was about 17 percent lower than it was in 2008.

Supply of late-model units

will reach the turning point in Q3 2013.

NEW VEHICLE SALESPost-recession sales average 29% lower than pre-recession sales.

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sale

s (m

illio

ns)

Source: WardsAuto.com

866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used Vehicle Prices

3

Supply levels across vehicle segments changed because rising gasoline prices and government-imposed increases in average fuel economy required manufacturers to produce fewer sport utility vehicles and more compact cars and car-based crossover utilities.

As shown, compact cars and their utility counterparts were the only two vehicle segments to see positive supply growth over the past three years. The large SUV segment experienced the largest drop — a staggering 42 percent decrease.

In times of economic instability, used vehicles become more attractive than new — so this negative shift in used supply coincided with strong demand growth. These trends have helped boost used vehicle prices over the past few years. NADA estimates that, relative to January 2008, used retail prices grew approximately 15 percent by the end of 2011.

The Used Vehicle Supply ForecastNew vehicle sales hit their low point in 2009 at 10.4M units and have been on the rise

ever since. Therefore, it’s reasonable to assume that we’re closer to the used vehicle supply trough than we are to the peak. However, consumer vehicles (i.e. non-commercial) don’t enter the used vehicle market in large quantities until three or four years after initial purchase, which means we must wait a bit longer before used supply reverses course and begins to grow. NADA forecasts that the supply of late-model units will decline for about another year and a half, and that we will finally reach the turning point in the third quarter of 2013.

USED SUPPLY BY VEHICLE SEGMENT FOR 2008 VS. 2011Annual change in used supply for models up to five years in age.

Used retail prices grew 15% from

January 2008 to December 2011.

-50% -40% -30% -20% -10% 0% 10%

Large SUV

Mid-Size Van

Mid-Size Utility

Large Van

Mid-Size Pickup

Large Pickup

Large Car

Luxury Car

Mid-Size Car

Luxury Utility

Sport Car

Compact Car

Compact Utility

Percent Change

Source: NADA Used Car Guide

866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used Vehicle Prices

4

That said, due to the structured nature of lease contracts, combined with shorter holding periods, off-lease volume will start to trend upward toward the end of 2012. In fact, we’ve already reached the turning point for off-lease units three years old or younger. This trend will provide some relief for dealers searching for clean, certifiable late-model units.

Used volume by segment will stay true to recent trends. The loss rate for large SUVs, mid-size pickups and vans will exceed the market average, while losses for compact cars, utilities and mid-size cars will be less severe.

So, what can we expect for the remainder of 2012? NADA forecasts that the supply of vehicles ranging up to five years in age will fall by 11 percent for the year, even with the assumption that trade-in volume will increase with new vehicle sales growth. That’s on top of the 7 percent loss experienced in 2011. Retail and lease returns will dive by 12 percent and 22 percent, respectively.

NADA USED VEHICLE SUPPLY AND DEMAND INDICES

0

50

100

150

200

250

Inde

x

Jan 20

09

Apr 2

009

Jul 20

09

Oct 2

009

Demand Up

Supply Down

Jan 20

10

Apr 2

010

Jul 20

10

Oct 2

010

Jan 20

11

Apr 2

011

Jul 20

11

Oct 2

011

Jan 20

12

Source: NADA Used Car Guide

USED SUPPLY TRENDS FOR 2006 – 2014Trends by new vehicle registration type for models up to five years in age.

500

650

800

950

1100

1250

1400

1550

1700

1850

2000

0

20

10

30

40

50

60

70

80

90

100

110

Use

d Su

pply

Vol

ume

(tho

usan

ds)

Used Supply Index (January 2006 =

100)

Turning Point: Q3, 2013

Month

Retail Lease Fleet Index

Jan 20

06

Jun 20

06

Nov 20

06

Apr 2

007

Sep 2

007

Feb 2

008

Jul 20

08

Dec 2

008

May 20

09

Oct 2

009

Mar 20

10

Aug 2

010

Jan 20

11

Jun 20

11

Nov 20

11

Apr 2

012

Sep 2

012

Feb 2

013

Jul 20

13

Dec 2

013

May 20

14

Oct 2

014

Source: NADA Used Car Guide

866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used Vehicle Prices

5

Used Price Study: Large SUVsAs mentioned earlier, the decline in used vehicle supply has led to a rise in used vehicle prices over the past few years.

We can illustrate this trend using outcomes from NADA’s used price forecast model, which includes assumptions for new vehicle prices, used vehicle supply, gasoline prices and other economic factors.

2012 NADA USED PRICE FORECAST FOR LARGE SUVSChange relative to February 2012 for models one to five years in age. Not seasonally adjusted.

The chart above shows two scenarios pertaining to NADA’s 2012 forecast for large SUVs. In the first scenario, we see that the negative effect of $4-per-gallon gasoline will drive down the price of large SUVs by 5.3 percent at the lowest point in the year (November). Results are dramatically different when we factor in the estimated 23 percent annual decline in used large SUV supply. Scenario two then, shows prices falling by a mild 1.5 percent at the lowest point in the year. Moreover, the supply lift improves as the year progresses because used volume for the segment will continue to wane well into 2013. In short, the limited supply of large SUVs will keep prices firm despite higher gasoline prices.

-6

-5

-4

-3

-2

-1

0

1

Mar2012

Apr2012

May2012

Jun2012

Jul2012

Aug2012

Sep2012

Oct2012

Nov2012

Dec2012

0.5% 0.9% 1.4% 1.8% 2.3% 2.8% 3.2% 3.7% 4.1% 4.6%

Perc

ent c

hang

e fr

om F

eb 2

012

Supply Lift

w/o Supply factorwith Supply factor

Source: NADA Used Car Guide

866.975.6232 | nada.com/b2b

Used Vehicle Supply: Future Outlook and the Impact on Used Vehicle Prices

6

Market ExpectationsAccurate forecasts require market expertise, analytical acumen and reliable data. Yet certain price drivers, such as the cost of gasoline, depend on unpredictable situations, such as current tensions in Iran.

This is not the case for used supply. We can say with a much greater degree of confidence that late-model supply will continue to decrease deep into next year because the catalyst for the change — the retraction in new vehicle sales — has already occurred.

This fact, combined with the intensified pace of consumer demand, translates into yet another year of used price appreciation. NADA forecasts that prices for vehicles up to five years in age will increase by 1.5 percent through December, relative to February, and the biggest gains in price will come in the second half of the year due to ongoing improvements in the economy.

While NADA’s used price outlook for the year is a positive one, downward pressure from the unexpected can never be ruled out; the events of 2011 are a vivid reminder of this. That said, the ongoing degradation in used supply will continue to support used vehicle prices — and as we’ve seen, no used price forecast would be complete without factoring in this critical component.

866.975.6232 | nada.com/b2b 7

NADA’s Demand Indices

NADA’s demand indices measure shifts in demand across time by reflecting the number of

units consumers were willing and able to purchase, had the price remained constant over time

and through different economic environments. The demand index is based on an estimate

of the shape of the demand curve — the price elasticity of demand — and an estimate of the

position of that curve based on the equilibrium price. A constant price is then utilized to solve

the demand equation. NADA calculates demand indices for both the new and used vehicle

market, down to the model level.

NADA’s Used Price Forecast

NADA’s used vehicle price forecast is based on expectations for changes to key market drivers,

combined with coefficients that estimate how each of these impacts used vehicle prices.

Expectations for changes to macroeconomic drivers are based on a consensus view from

professional forecasting organizations with adjustments made by NADA economists. Endogenous

depreciation, seasonal patterns and expectations for new vehicle prices and incentives are

estimated by NADA economists and the editorial team. Relationship coefficients are estimated

by NADA’s proprietary statistical model.

NADA’s Used Supply Forecast

NADA’s used supply forecast is an estimate of the number of vehicles expected to be offered for

sale in the future. NADA calculates used supply volume as the pool of potential vehicles which

could return to the market — as represented by all new vehicle sales — and the probability that

a vehicle will return from a particular source (i.e., rental, consumer lease, consumer purchase,

etc.) after a predicted use period. For example, vehicles sold to rental car companies and

consumers each have a specific probability curve associated with the historical likelihood to

return to the used market after a given use period. The product of the vehicle pool and the return

probability is the expected value of the volume of returned vehicles, which is aggregated to

create the used supply volume. NADA calculates used vehicle supply down to the vehicle level.

About NADA