Thursday, 22 September 2011 16:00

Knowledge is Power—Market Forces Control Total Loss Vehicle Valuations but Shops Can Profit from the Right Information

Written by Greg Horn, Vice President of Industry Relations at Mitchell International

In my recent Industry Trends feature article, Timing is Everything: Total Loss Values and Gas Prices, I explored the impact of rising fuel prices on resale values. This phenomenon initially interested me because I had traded in my Chevrolet Suburban for a more fuel efficient vehicle just before fuel prices reached above $2.40 per gallon. Not too soon after, fuel prices rose to near record levels for the second time in recent history.

What we witnessed in this recent rise was, in large part, due to a group of futures investors. These speculators bet on the rise of fuel prices, and their investment actions in turn caused prices to remain inflated even when the price of the crude oil had fallen and production was not an issue.

In early May, the situation with gasoline futures became so intense the Obama Administration released some strategic oil supply onto the market to ease the spiraling price at the pumps, at least temporarily.  There are a few important questions we need to answer to fully understand this chain of events and how the industry can learn from it:
1.  What is the relationship between fuel prices and resale values?
2. What can collision repairers do about the total loss decision process that is primarily in insurance companies’ hands?


First things first—the findings
We selected representative vehicles from our Total Loss Valuation Data Warehouse that would epitomize the hybrid, fuel efficient and gas guzzler categories—the Toyota Prius and Corolla and the Ford Expedition.   Looking at the relationship between fuel price spikes and values showed an obvious trend that has been verified by other evaluation and market sources—fuel efficient cars rose in value recently.

 

However, a second factor should be noted. There is a market reaction time, a delay between the rise in fuel prices and the rise in value of the most fuel efficient vehicle, the hybrid.  You’ll note in the Prius vs. Gas Price chart that our total loss average value for the Prius still shows an upward trajectory despite a lowering of fuel prices. That illustrates a market lag of approximately three weeks. If you were to visualize moving the total loss values over one column to the left, you would see a tighter correlation between the two chart figures.

On the opposite end, there is a similar lag pattern with gas guzzlers, albeit with more volatility in the average total loss value price. Gas guzzler values are traditionally more volatile during fuel price fluctuations, depicting a “wait and see” mode for many owners that, unless faced with a total loss or urgent need to sell the vehicle, may elect to hold on to the vehicle and hope for a return to more moderate gas pricing.

A similar picture of a lag relationship between higher fuel prices and Toyota Corolla values (our fuel efficient representative) appears as well. Some may question why we used two vehicles from the same manufacturer, but because they have been top sellers in their class for a number of years and represent stable body styles (meaning that the launch of newly restyled cars that would lower value during the test period did not take place), the Corolla is a good indicator of market forces.

What can we conclude from this data?
A few important facts come to mind:
1. Fuel efficient vehicles tend to rise more quickly and reliably in value during periods of high prices than gas guzzlers fall in value.
2. During fuel price volatility, the reaction time in total loss values is less than a month, which points to the importance of the accuracy of a true market survey method for evaluating a total loss. In the traditional book value approach, the lag time for gathering the data from the gathering sources, calculating and then publishing  the data can take longer than the short value lag time we see present in the charts shown above.

What does this mean for collision repairers?
While many shop owners and managers reading this article may think there is nothing they can do about the total loss decision process, there are two areas you can concentrate on. First, in dealing with insurers, you know the damage to the vehicle better than they do and what it will take to properly fix the car.
A few questions you definitely want to start asking the insurance company are:
1. How are you basing your total loss decision?
2. Are you using the book value or true market value of the vehicle?
3.  How are you calculating the salvage return?
4. Are you using the “net value” of what you will receive? They will spend in the neighborhood of $175 to process the vehicle to sell at a salvage auction and may owe you for storage if the vehicle totals. These dollars add up and may tip the vehicle to the repair column.

Secondly, you may be dealing with personnel in the claims department that handle multiple states and may not know your state’s total loss regulations. I strongly encourage shop personnel to become experts on the total loss and titling regulations in your state. Once you read the regulations, you will find that our cars have become more complex but our total loss regulations haven’t changed.

The folks at the Nevada Collision Industry Association realized this and successfully changed the total loss regulation to simply “back out” the cost of the electronic components when calculating the total loss equation. The revision aims to put more cars back in the owner’s garage. An interesting side benefit (and a major reason I believe the bill passed) is that repairing cars is good for a state’s economy. Early calculations indicate that the annual impact of sales taxes in Nevada paid on these higher dollar amount estimates that end up being repaired will be in excess of $800,000.  Not to mention, the workforce implication of selling more parts and repairing more cars is extremely positive.

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