NADA Used Car Guide: Rethink new-vehicle value math

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Photo credit: DAVID PHILLIPS

Auto lenders have long relied on the manufacturers’ suggested retail price, along with finance amount and consumers’ credit profiles, to make a new-vehicle financing decision.

Now, though, NADA Used Car Guide is recommending that lenders and dealers treat new-vehicle valuations more like used-vehicle valuations.

“We’re suggesting that they enhance their current processes with a market-based benchmark rather than solely going on MSRP or dealer invoice,” Larry Dixon, an analyst at NADA Used Car Guide, told Automotive News.

On used-vehicles, lenders base their decisions on a market analysis of actual transaction prices, which reflects a more accurate depiction of market activity with incentives and rebates.

For new vehicles, lenders look to MSRP or the dealer invoice price, but those factors “reflect automaker pricing expectations more than market activity,” according to NADA Used Car Guide’s white paper entitled “An Updated Pricing Approach for New Vehicle Financing.”

MSRP and dealer invoice price are “largely static” and typically don’t account for the fluctuation of actual sales prices, the white paper said.

“NADA Used Vehicle Car Guide’s New Vehicle Values provides a more accurate representation of where prices really are, as opposed to a preliminary suggestion of pricing made prior to the start of new-model-year sales,” the white paper said.

Under the current model, auto lenders could “open themselves up to additional risk,” Dixon said. Using the new-vehicle values index will help lenders assess risk more accurately.

To determine the New Vehicle Values index, NADA Used Car Guide’s team is “looking at actual retail sale transactions — new-vehicle sales transactions that are collected from the Power Information Network from J.D. Power,” Dixon said.

The point-of-sale data come directly from franchised dealers and has been analyzed by Used Car Guide’s vehicle valuations staff, he said.

From a marketing standpoint, the new-vehicle values index helps dealers price their vehicles competitively.

“Obviously, consumers have a great deal of access to pricing information on the Internet, and they will shop around today more so than they ever have before,” Dixon said.

Widening gap

Power Information Network data show that finance amounts and MSRP are rising faster than overall vehicle prices are climbing when incentives and rebates are factored in.

With incentives and cash rebates, overall new-vehicle transaction prices averaged 91 percent of MSRP in 2015, down from 93 percent in 2011. The 2-point fall over a four-year period may seem slight on the surface, but the change varies by segment.

For example, prices in the small-car segment averaged 91 percent of MSRP in 2015, a 6-point decline from 2011. Compact car transaction prices averaged 90 percent of MSRP in 2015, compared to 95 percent in 2011.

Midsize pickups, on the other hand, grew 4 points to reach 97 percent of MSRP in 2015.

Incentives that likely contributed to the widening gap between actual price and MSRP will continue to grow, Dixon said.

J.D. Power forecasts that U.S. new light-vehicle sales will grow 2 percent this year and 1 percent in 2017. Incentives already rose 10 percent in the first quarter of 2016, according to the white paper.

“In the face of slowing growth and increased competition, the potential for incentives to increase is much higher,” Dixon said.

Negative-equity climb

Meanwhile, Dixon also says negative equity will continue to grow as used-vehicle supply increases and used prices dip in response.

In the first quarter, the share of new-vehicle transactions with a trade-in that had negative equity reached 31.3 percent, a more than 2-point gain over the year earlier.

“We’ve gone through a historic period of strength, and negative equity fell quite dramatically,” Dixon said. “There’s really only one way for that to go moving forward, and that trend is going to reverse itself. Negative equity will continue to increase.”

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NADA Used Car Guide: Rethink new-vehicle value math