Forecasts and Stress Scenarios of Used Car Prices

Forecasts and Stress Scenarios of Used-Car PricesPEDRO CASTRO, SENIOR ECONOMIST, CREDIT ANALYTICS

TONY HUGHES, MANAGING DIRECTOR, HEAD OF SPECIALIZED MODELING

ZHOU LIU, DIRECTOR, CREDIT ANALYTICS ECONOMIC OUTLOOK CONFERENCE, MAY 2015

22

Used-Car Price Landscape

» Kelley Blue Book and others provide current estimates of used-car

market value but they do not provide forecasts and scenarios.

» Many providers produce subjective assessments of future car values.

ALG combines model-driven projections with subjective overlay.

» Stress-testing has revealed a need for wholly model-driven

projections. Rigorous back-testing and complete documentation are

also mandatory.

» Many applications suggest that purely quantitative approaches

compete very favorably with subjective assessments. Models users’

own subjective overlay can be applied to a “clean canvas.”

33

Introducing: AutoCycle™

Moody’s Analytics AutoCycle™ solution offers a quantitative, consistent,

and documented methodology for incorporating economic factors into car

price forecasts.

» Forecasts are driven by macro factors (supply and demand drivers of

vehicle value in different categories).

» Account for mileage and age; some variations in trim levels.

» We can project both existing and future model years (i.e. 2016 Jeeps).

Phase 1 Complete Complete demo based on models developed for existing clients. These are portfolio-level models

geared to stress-testing lease portfolios of popular car brands.

Phase 2 Apr 2015 More general models developed to cover the full range of cars and trims at a highly granular level.

These models are also geared to portfolio-level analysis.

Phase 3 Jun 2015 VIN-level models, calibrated to the portfolio-level projections, that allow us to consistently capture

individual vehicle characteristics (such as extreme mileage or premium trim packages).

44

Data and Structure

We use data from Auction.net in the U.S. These are wholesale auction

price outcomes observed over many years.

Data cover a very wide range of brands. Popular brands are better

populated (and this produces more accurate results) than secondary or

exotic brands.

We have done similar work in Canada and can do this on a custom basis.

S5

BLS4

$

Time

Average price of

2014 Jeep Wrangler

55

0

2,000

4,000

6,000

8,000

10,000

12,000

Mar-00 May-02 Jul-04 Sep-06 Nov-08 Jan-11 Mar-13

Vehicle Depreciation Curve

Auction prices for Toyota Corolla gas sedan, model 2000

Sources: NADA, Moody’s Analytics

66

» Temporal and physical depreciation

» Newer models have better features that make older ones less

attractive.

» A more intensively driven car sells at a lower price, controlling for

other factors.

» Change in dynamics in used-car markets

» Markets are ever changing.

» Prices are a function of supply and demand.

What Drives Used-Vehicle Price Change?

77

» Auto markets condition

» Consumer demand condition

» Interest rates

» Gas prices

What Explains Dynamics Change in Used-Car Markets?

88

Bank Prime Rate Debt Service Burden

Interest Rate for New-Car Loans Consumer Confidence Index

CPI New Cars Total Employment

CPI Used Vehicles Labor Force Participation Rate

CPI New Vehicles Total Population

Manheim Used Vehicle Value Index Disposable Personal Income

Vehicle Sales Unemployment Rate

Auto Inventory-to-Sales Ratio Brent Crude Oil Futures Prices

Stock of Cars in the U.S. Total Motor Fuel Usage on Highways

New Vehicle Registrations CPI Gasoline

Potential Macroeconomic Drivers

99

Cars are assigned to different segments and each segment will have

different sensitivity to macroeconomic environments.

Prices Respond to Environment Differently

Compact Midsize Utility

Sport Compact Utility

Near Luxury Midsize Van

Luxury Utility Subcompact

Luxury Midsize Large Pickup

Luxury Midsize Pickup

Midsize Large Van

Large Large SUV

1010

Dataset

Data from National Automobile Dealers’ Association (NADA)

Cover 81 million transactions

Transaction months: Jan 1997 to Dec 2014

Model year: 1997 to 2014

This is not a transaction-level dataset: 2.2 million observations

Each observation aggregates between 2 and 9,200 transactions

» Mean # of transactions per observation = 47; median = 15

» Std. dev. = 134; 5th percentile = 2; 95th percentile = 176

Transactions aggregated by vehicles/model-year

1111

Dataset

Unit of analysis: vehicle – model year

Vehicles are defined by unique combinations of:

» Forty different Makes (e.g.: Toyota, GM)

» Model (e.g.: Corolla, Impala)

» Six different fuel types (gas, hybrid, diesel, natural gas, ethanol,

electric)

» Eighteen different body types (hatchback, sedan, convertible, etc.)

We observe transactions for 1196 different vehicles

» Honda Accord Gas Sedan, Ford Focus Gas Hatchback

What else do we observe?

» MSRP Values

» Average price of underlying transactions

» Average mileage of vehicles, etc.

1212

Compact Luxury Utility Midsize Compact Utility

Sport Luxury Midsize Large Subcompact

Near Luxury Luxury Midsize Utility Large Pickup

Midsize Pickup Large Van Large SUV Midsize Van

Sixteen Segments

Segments Play a key role in identifying common trends across vehicles

Heterogeneity of segment sensitivity to macro drivers affects vehicles

relative prices

1313

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Spliced Fitted

Forecast: Price to MSRP

Ford Taurus gas sedan 2001

Source: Moody’s Analytics

1414

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


Spliced - Baseline Fitted - S4 Stress


Ford Focus gas sedan 2006


1515

0.4

0.6

0.8

1.0

1.2

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Baseline S4 Stress S8 Low oil price


Ford Explorer gas utility 2015

Sources: Moody’s Analytics

1616

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Baseline S4 Stress S8 Low oil price


Toyota Camry gas sedan 2015


1717

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Spliced - Baseline S4 Stress Fitted - S8 low oil price

Forecast: Price to MSRP Ratio

Honda Civic gas sedan 5 yrs old


1818

0.35

0.40

0.45

0.50

0.55

0.60

0.65

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Baseline - Spliced S4 Stress S8 Low oil prices - fitted


Audi A4 gas sedan 4 yrs old


1919

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Age 2 Age 3 Age 4 Age 5 Age 6 Age 7


Toyota Camry gas sedan 2 to 7 yrs old – spliced series


www.economy.com

United States

121 North Walnut Street

Suite 500

West Chester PA 19380

+1.610.235.5299

Australia

Level 11

1 O'Connell Street

Sydney, NSW, 2000

Australia

+61.2.9270.8111

United Kingdom

One Canada Square

Canary Wharf

London E14 5FA

+44.20.7772.5454

Prague

Washingtonova 17

110 00 Prague 1

Czech Republic

+420.22.422.2929

2121

© 2015 Moody’s Analytics, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS

PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER

TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN

WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or

mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall

MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or

otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with

the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special,

consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility

of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if

any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or

recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS,

MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE

BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made

by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of

each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding, or selling.

Economy & Finance

Forecasts and Stress Scenarios of Used Car Prices