Hammer Time: Past Profits, Future Prophets

One fond memory I have of the pre-recession era was cheap cars. A pristine 1992 Mercedes 190E in a garage kept red that I bought for $1000. The two year old 2002 Infinit Q45 that I bought for $23,600 and sold for $32,500. Heck, even the beaters. Old late 80’s Town Car’s and Crown Vic’s with only 80k or so. The last of the good Saab 900’s. Volvo 240 wagon’s that had been given Volvo OEM components from day one. All of them I bought for $500… or less.

It had been a great time to be a used car dealer and an automotive enthusiast. I sold over 150 vehicles in a space the size of a driveway and had plenty of time to travel, do some local bid calling, and begin my writings at TTAC. I was a happy man.

Then it all went to the proverbial pot. 1000+ new car dealers got shuttered and the remaining dealers looked at their sleds (trade-in’s that were $5000 or less) as new sources of revenue instead of assets that needed to be liquidated on the cheap. The finance fodder that had guided new car sales went the way of irrational exuberance and liar loans.

Buy-here pay-here dealers quickly began to occupy the gaping void that had been left behind in the conventional finance markets. The bidding wars at the auctions soon began and what was once a $700 throwaway vehicle soon became a $1500 car that could now make over $3000 if you could market it right. A low-end 12 year old Taurus which would have usually financed for $500 down and $50 a week for 12 months now fetched $700 down and $60 a week for 15 months… then it was 18 months. Now it’s two years plus a healthy smattering of bogus fees.

One reason is because that same 12 year old Taurus is likely fetching more than $2500 at the wholesale level. Millions of consumers need wheels now and the manufacturers and the banks aren’t able to finance them. Bad credit. Bankruptcies. Repossessions. Judgments. Foreclosures. All these issues that used to be exceptions are now as common as Wal-Marts in most areas of this country.

I expect folks to have at least one of these issues. Whereas beforehand I would always sell these cars for cash and be done with it. Now I can’t. My $1500 to $2500 cash licks have largely gone down to a $300 to $700 level, with fewer of them. Wholesale prices have gone way up. ‘Good’ inventory has gone way down. To the point where you now go to an auction and 90+% of what you see is junk that was hoarded by dealers who now try to get the premium prices that come with tax season.

There is a magic spigot that will end most of this. Credit. Or to be even more precise, credit scores. Once consumers begin seeing their past transgressions fall off their credit reports, the used car market will begin to slowly decline. That is assuming that a ‘black swan’ event doesn’t happen between now and then.

The foreclosures and credit card deficiencies that began in earnest on early 2007 should begin to be cleared off consumer’s beacon scores by 2014. Seven years is usually the limit for these items and despite the usual self-anointed labeling of buying behaviors, we are not a nation of fiscal conservatives. Between keeping ‘Old Reliable’ and buying the new car, most sub-prime consumers opt to play the part of the rich man by remaining a poor man.

Will that be the end of the highly priced used car? Nope. From late 2008 to early 2011 there was a massive reduction in new cars built. This should lead to continued high prices for used cars in the times to come.

But who knows? Maybe the purchase price for new vehicles will decline by a third (in real terms) as it did between 1994 and 2009? Perhaps the number cf components needed to make a car will continue to decline? Or cars may become modular with electric batteries taking the place of their internal combustion engines? There are millions of what if’s in this business.