By on November 9, 2012

 

During the next several weeks you are going to be exposed to a lot of pointless hysteria about used cars prices in the Northeast.

Journalists will point out the extremes and the outliers to a media audience that is always easily attracted to the extremes and outliers of our society.

But it won’t be the truth. The real bump in traffic related to Hurricane Sandy won’t be with used cars at all.

It will be with new cars.

Just like Hurricane Katrina in 2005 which destroyed well over 600,000 cars and trucks,  Sandy’s estimated totaling of 250,000 vehicles will likely generate four types of buyers in the car market.

1. The Late Model Customer

Consumers who have a vehicle that is between 1 and 3 years old will, in the overwhelming majority of cases,  be buying new. Why? Because the used car prices for vehicles that are 1 to 3 years old were already exceptionally strong even before Sandy swept through the Northeast.

2009 and 2010 new car sales were down by more than 30 percent from their 2007 peaks. This lack of demand helped catapult wholesale prices to new historic highs this past year, which were further helped by the strong recovery in used car sub-prime financing.

These late model vehicles, the few that exist, are already usually selling for anywhere between 75% to 110% of retail prices due to the lack of supply and improved access to credit. Based on those two factors and a further increase in demand, you will likely see most late model customers opt for a new car instead of an overpriced used one.

2. The Used Car Customer With Full Insurance Coverage

Your car was worth perhaps $5,000? Or $10,000?

What will you do?

Many of these folks will end up getting the “extra” car. Those cars that are rarely driven due to too many cars in the family household, or the aging of an older relative, will likely go to that friend or relative who has a greater need for transportation.

This is a more common scenario than what is reported in the newspapers because, to be frank, it’s not quite a newsworthy event.

However this transfer of ownership within family and friends usually makes up approximately 10% to 15% of used car transactions depending on who you believe. In times of devastation, this organic replacement of vehicles takes place to a far greater degree than usual.

A. Supply Normalization

There is also the flood of individually owned used cars that will likely still many of the waters of high demand within a month of the current demand spike.

Long story short, folks who have been on the fence when it comes to replacing their car, will read the extreme sensationalist garbage that passes off as journalism, and put their own car up for sale.  Prices come down. Usually within a four to six week period, and the imbalance between supply and demand begins to normalize… for used cars.

This stabilization does not happen in the new car market.

B. Media Derived Demand For New Car Sales

New car sales usually increase substantially in the months following a large scale natural disaster, or man made event, because the mainstream media invariably ends up covering the car market to a far greater degree than before.

Often times the increased demand will be attributed to an advertising promotion of a manufacturer that is given headline exposure by the mainstream media. Such as when GM offered 0% financing two months after the events of 9/11.

However, the increase in that demand originates squarely with the fence sitters. Those folks who are normally not part of the new car market. But end up entering the market thanks to the perception of getting the better deal. I believe Sandy will follow the trends of other storms and disasters of creating media coverage that pushes the fence sitters away from the keeping mentality, and into the illusions of the marketplace.

3. The Used Car Customer With Only Liability Coverage

Otherwise known as “the screwed”, most folks associate these car shoppers as the ones who simply don’t have the means to satisfy their automotive ends.

It’s not always true.

In fact, the frugal among us will simply pay cash and drive a car to the point where some major component goes kaput, and then repair that part while continuing onward to the glory of  our low-cost lifestyle.

There are a lot more of these folks now than five years ago.  But in balance, there are also a far greater number of car owners who are struggling to get by and do this more out of necessity than desire.

For those who lost their car to Hurricane Sandy with only liability coverage, the questions become the following…

“Do you have $1,000 to put down?”

“No? OK. Do you have $500?”

“No? Well…. do you have a job?”

You may think that these questions will be asked at the local buy-here, pay-here used car dealership. As an owner of one, I can tell you that these words are frequently uttered there in rather casual language.

But they are also implied at a new car dealership as well through a credit application.  Financing often requires some money down to be approved. Leasing usually requires a bit less.

A lot of potential used car buyers in Sandy’s wake are going to be reading about exorbitantly priced used cars, and decide that a new car, at least in the short term, is the way to go.

This won’t be everyone who has liability insurance. The credit challenged will still be trudging forth to the nearest used car dealership and paying a financial penalty for poor credit or unproven income.

Still those who have decent to middling credit will likely avoid the sub-prime financiers of last resort and go straight to the sub-prime financiers of second to last resort, the new car dealership.

4. The Rest Of Us

We almost forgot the largest slice of the market. Those of us who still would have been in the market for a car even if Sandy had never taken place.

Although we like to think that we are all beyond the clutches of manipulation, many of us, even the wisest and fiercely opinionated among us, fall victim to it.

This is what you will likely see in the months to come.

“Cash For Sandy”

Through the ever loving kindness of banks and other financial institutions, many manufacturers will soon be offering rebates and incentives that will trumpet corporate altruism with the ever righteous emotional chords of patriotism.

“Buy our car, and you’ll pay less! Because you are an American who suffered!”

Images of people helping people, reassuring smiles, and a pissed off bald eagle flying through the mountains, will be intertwined with big round numbers on the screen filled with small print legalese underneath.

It may be a $2500 rebate. Or 0% financing. Or no money down.  It may have some gotcha that states you must pay the MSRP. Or has fees that make the financial deal, in effect, a loan with plenty of cost. But it will sound real good. At least for 30 seconds.

My advice is whenever you see these delusional of images of grandeur, don’t spend money. Don’t buy anything. Go to TTAC and read up on some old Hammer Times or take a jaunt through some Junkyard Finds. The best part of being an auto enthusiast is knowing you don’t have to spend new car money to enjoy the hell out of your favorite hobby.

All the best!

Get the latest TTAC e-Newsletter!

18 Comments on “Hammer Time: Cash For Sandy...”


  • avatar
    el scotto

    Steven, thanks (as always) for your post(s) from someone who makes their living from buying and selling vehicles for a living. Your post(s) give real-world, boots-on-ground examples/experience vice fanbois arguing about an air intake on a Ferrari. Thanks.

  • avatar
    Dyl911

    Great article.
    We have a 2008 Legacy GT with low miles that we were looking to move out of before Sandy. We are still undecided regarding new/used and what car. (So few that fit all the desired notes.) Should we sit on the sidelines until this blows over? It seems like that’s what you are driving at with the above.

    • 0 avatar
      PrincipalDan

      Well Steven is trying to say that New Car Prices will not be affected as much as used car prices. And the prices will only be affected in a small part of the country. Keep that in mind. But you also sound like you’re not quite sold on a new vehicle yet.

  • avatar
    racer-esq.

    For those with comprehensive coverage this will be awesome, with regard to their cars. They will get a fat check from the insurance company that overvalues the car (that is why I ALWAYS hope a car will be totaled instead of repaired), just in time for when cars are at their cheapest selling prices of the year, especially 2012s.

    People are going to be much more SOL with regard to their houses. That is where insurance companies really screw people. The people who had their houses burn down, instead of merely flood, are, relatively speaking, the lucky ones.

    • 0 avatar
      krhodes1

      No doubt – not much has been said in the media about how many of the affected had flood insurance. The problem with which is, if you really NEED it, it is REALLY expensive. And if you don’t really think you need it, you don’t buy it. Then that once in a 1000 years storm happens, you have a canoe in your living room and you are well and truly screwed.

      I’m actually more than 30′ above a river that is 1/4 mile away, and I still carry flood insurance with a fairly large deductible. You just never know, and since I don’t technically NEED it, the cost is semi-reasonable.

      I bought my current project car (’87 Porsche 924S) from a little dealership on Staten Island six weeks ago that I am quite certain had to have been completely washed away. It was just across the street and through some marshland from the water, at the bottom of a valley.

    • 0 avatar
      CJinSD

      Why is there an expectation that people will be paid more than their car was worth by their insurance provider? I was once offered 60% of what I paid for a 3 month old Ford by the insurer of the woman who totaled it.

      • 0 avatar
        highdesertcat

        No insurance provider is going to make you whole again after a loss. When a friend of mine had his brand new conversion Van stolen in El Paso, TX, on the day he bought it, his insurance company offered him 80% of what he had paid for that Van.

        I think after all the crying is done, we’ll see that superstorm Sandy is no different than the reimbursement people got for their losses after Katrina.

      • 0 avatar
        CJinSD

        In my case, I refused the settlement offer and so the insurer said he’d fix the car to spite me. I didn’t care. As it worked out, the repairs took 3 months thanks to errors in Ford’s parts system. The car was a new-to-the-market Festiva, but the body shop kept receiving Ranger body panels. The repair cost wound up being $5,600 instead of the estimated $4,100 and the insurer also had to provide me with rental cars for 3 months. Did I mention I was 17 at the time and used up one of the rental cars after 2 months? The body shop told me that the insurer could have bought me a very nice used car for the price of the Avis rental to a teenager and then thrown it away when I got my car back. Incidentally, a few weeks later my car was back in need of body work. I hit a suicidal deer that jumped between me and the truck I was caught behind. The shop that had worked on my car the fist time told me that they no longer handled crash repairs.

      • 0 avatar
        highdesertcat

        Yep, the insurance game is one of the biggest rips out there and the customer always loses. Several years ago my wife’s Towncar got a dented trunk lid when a lady backed into it. The lady was covered by Geico. We are covered by USAA, so the dent was going to get fixed in any case.

        But Geico was great. They contacted us, told my wife where to drop off the Towncar for repair, and sent her a check to cover the rental for a week.

        They paid for a new trunk lid and bumper cover, and the repair shop gave us the old parts (trunk lid and bumper cover). It took exactly five days, dropped off Monday morning, picked up Friday after noon.

        I would say that was the exception, not the rule.

      • 0 avatar
        Don Mynack

        Yeah, I don’t get the original comment at all. I’ve never been offered a fair settlement for a total…the only time I ever have “profited” from an insurance payment is through a repair that I could have done through a trusted body shop that I know is cheaper than the dealership.

        I have a friend who is a Toyota master tech. Drove a pristine mid 90′s Lexus, did all repair himself, detailed, etc….until it was T-boned at a intersection. He was offered a low ball “market value” on a total…only a couple grand, since it was nearly a 20 year old, fairly common car.

  • avatar
    tparkit

    I like your recap of the typical credit conversation between buyer and dealer. While passing by a new condo tower near where I live I noticed they were having open house, and since I wasn’t in a hurry I stopped to see what the place was like. The most interesting part was my chat with a saleslady. She got right to the credit part, and from her pitch it was obvious she assumed I had little money for a downpayment. Her approach was probably based on her experience.
    =========
    “In fact, the frugal among us will simply pay cash…”
    Absolutely. Living on credit is the Great American Way to stay poor.

    • 0 avatar
      krhodes1

      Again, it depends. If you have the money to pay cash, but they offer you <1% interest, FINANCE IT! The truly rich got that way using other people's money! Put your cash to work, even if it is only into your 401K. My portfolio has been doing 6-8% annually for the past 4-5 years, I would have been STUPID to pay cash for my car, though I certainly could have. I pay cash for my toy cars, and I never spend more than $5K on them. But those are toys, not transportation.

      Sure, I would have been even better off with a 10yo Toyota than a new BMW, but as has been said, "never seen a Hearse with a U-Haul", and hairshirts get mighty itchy.

  • avatar
    GaryfromJersey

    Good article, but maybe you should also warn people to be careful when buying a used car in the storm region. Other times we had a big one cars that should have gotten a salvage title were hosed off and sold as undamaged. Saw that too many times.

  • avatar
    Felis Concolor

    I’m in the wrong area to attempt to take advantage of the storm damage hype, but it’ll be interesting to learn if the media FUD does indeed improve the used car pricing situation out there.

  • avatar
    olddavid

    We experienced a cataclysmic hail storm while painting my Mother’s house this summer. A little Canadian prairie town of 4,000. The insurance companies were on it the next day. I was on it two days later. I’m now the proud owner of a 2001 Regal LS w 60k miles and a 2006 Pontiac Vibe w 20k miles that drive perfectly but look as though a ball-peen hammer gang rampaged indiscriminately. For about 20% of wholesale. My upbringing in the industry allows me to appreciate the machinery w/o emotional or egotistic investment. In theory. Said by a man still justifying that Catera purchase.I guess my point is that careful evaluation will yield some gems among the wreckage, but they will be difficult to perceive.

    • 0 avatar
      danio3834

      I’ve bought a couple hail damaged cars as well. They’re my favorites as I learned paintless dent repair when working in body shops.

      These cars are usually in great mechanical shape and can look good with a day or two worth of work, sometimes with a bit of paint work.

  • avatar
    Mullholland

    Steven: Great read and thoughtful analysis, as usual. I’ve read and enjoyed just about everything you’ve written here over the years. Based on my years working in the creative art of marketing of new vehicles for over 30 years, I’ve developed this philosophy: As a finder, keeper and maintainer of vehicles that deliver high value it all comes down to this irrefutable truth:
    Nobody rides for free. You either pay a crooked banker every month or an honest mechanic when you need one.

  • avatar
    Mullholland

    Steven: Great read and thoughtful analysis, as usual.
    I’ve read and enjoyed just about everything you’ve written here over the years. Based on my years working in the creative art of marketing of new vehicles for over 30 years, I’ve developed this philosophy: As a finder, keeper and maintainer of vehicles that deliver high value it all comes down to this irrefutable truth:
    Nobody rides for free. You either pay a crooked banker every month or an honest mechanic when you need one.


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Authors

  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Matthias Gasnier, Australia
  • J & J Sutherland, Canada
  • Tycho de Feyter, China
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Faisal Ali Khan, India