01/30/24 09:05 AM EST

A Bumpy Ride in the Auto Market

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Hedgeye’s Jay Van Sciver has done an excellent job covering Tesla. Please refer to his research on the individual name. To be sure, Tesla shareholders are experiencing some severe range anxiety as the company loses pricing power in a sea of inventory. Let’s check in on the rest of the auto market in general.

Used vehicle prices at auctions have continued their decline, with a 0.5% drop in December from November on a seasonally adjusted basis, according to the Manheim Used Vehicle Value Index. Manheim, the largest auto auction house in the U.S., has seen its index price fall to $18,110, a significant 20.9% decrease from its peak in May 2022. This downturn follows an extraordinary price surge during the pandemic, where the index jumped by 63% to $22,902 from February 2020 through May 2022. As of December, 53% of that increase has been erased.

The pricing dynamics at auctions reflect dealers' hesitation in the face of consumer pricing resistance, a stark contrast to the pandemic period when consumers were willing to pay premium prices for used vehicles. This led dealers to reluctantly bid higher at auctions, spurred by the abundant availability of money and a lack of price sensitivity among buyers. As a result, many buyers from 2021 and 2022 are now facing the reality of their vehicles' values diving beyond normal depreciation rates. And trying to extricate themselves from loans with thousands in negative equity.

Despite the fall in auction prices, used vehicle inventories remain relatively tight, with 2.36 million vehicles estimated at dealerships in November, lower than the 2019 range of 2.8 to 3.0 million. This price decline amidst tight inventory suggests that many consumers are refusing to engage at current price levels. Retail prices have also experienced a historic drop, down 12.8% from their peak in July 2022, according to the Consumer Price Index (CPI) for used vehicles. The spring of 2023 saw a surge in both wholesale and retail prices, contributing to the remarkable volatility of the used vehicle market over the past three years. While wholesale prices have dipped below early 2023 levels, retail prices haven't yet reached those lows and even showed a slight uptick in November.

One very telling metric we will be watching is manufacturer incentives offered to consumers, which evaporated post-pandemic and are now coming back meaningfully. Notably, GM boosted incentives by a hefty 78% to an average of $2,462 per vehicle. While higher than a year ago, GM's incentives remain well below pre-pandemic levels when they were in the range of $4,600 to $5,400 per vehicle. Combined with higher prices and much higher interest rates, it's no wonder that sentiment in the industry remains challenging.

Learn more about the Market Situation Report written by Tier 1 Alpha.