COVID-19 Crisis Causes a Vehicle Valuation Issue
Like many of you, I’ve been on the phone and in meetings almost constantly for the past two weeks.
I apologize to dealers who may be still waiting for a return phone call and conversation. You’re on the list, but it’s a very long list.
I’ve been working with my Cox Automotive colleagues to schedule a broader live, online forum where I can help answer some of the most persistent questions dealers are asking amid the COVID-19 crisis.
This effort will include a memo that attempts to provide guidance and perspective to dealers about the best ways to move their businesses forward as vehicle sales and service volumes have either slowed to a trickle, or stalled, in many markets across the country.
I’ll keep everyone posted as we lock in a date and time for the live event.
In the meantime, there’s one issue that merits addressing right now because it has bearing for every dealer, whether you are still able to retail new and used vehicles or not.
The issue: The valuation references many dealers use to appraise auction and trade-in vehicles may not reflect the actual cash value of vehicles today.
Dealers have noticed the problem.
They’re asking why the Manheim Market Report (MMR) average for a vehicle is higher than real-time auction sales prices. Some are also questioning why vAuto’s Market Days Supply (MDS) metric doesn’t seem to match their sense of the market.
The root of the problem is the widespread business disruption everyone seems to be feeling.
The disruption has caused retail and wholesale transactions to fall off a cliff.
The sudden loss of this sales activity, to put it in plain terms, mucks up the measures Manheim, vAuto, Kelley Blue Book and other third-party valuation guides use to gauge vehicle values.
At Manheim, Ben Flusberg, associate vice president for M LOGIC, provides a deeper explanation of the business disruption’s effects on MMR valuations.
He also shares Manheim’s work-around for dealers. The company is publishing a daily index adjustment, which is called MMR Retention. Dealers can use the daily MMR Retention in conjunction with MMR to appraise vehicles and arrive at values better suited for current market conditions.
Meanwhile, vAuto’s team in Austin will soon release a system that alerts dealers when vehicle sales rates suddenly change, for better or worse, in the last two weeks.
When such sudden shifts occur, the system will provide alerts to indicate any imminent change to a vehicle’s MDS. With these alerts, dealers can know the degree to which a vehicle’s MDS is stable, improving, sliding or in free-fall.
Every dealer should know that the valuation guides will normalize as the market stabilizes.
Until then, it’s extremely important that dealers to pay careful attention to vehicle appraisals. Now is not the time to be acquiring trade-ins at values higher than their actual cash value today.
Similarly, dealers should be mindful that while you may be compelled to over-pay for a trade-in vehicle to put a new car deal together, if you do it, you’re raising the risk of booking at profit today that will “wash out” when the trade-in eventually retails.
I’ve been cautioning dealers to think twice about whether it’s wise to do everything you can to sell new cars in the current environment.
Remember, the factories are providing financial assistance in the form of interest credits and ever-more incentive dollars to help you with your new vehicle inventory.
But no one will provide any financial assistance if you over-pay for a used vehicle.
The issue with vehicle valuations is one of several COVID-19 crisis-related topics I’ll be addressing in the upcoming webinar, and in ongoing blog posts here.
Stay tuned for more, and stay safe and healthy.