By on March 18, 2009

Bloomberg (and a lot of other good-news-hungry outlets) are reporting that a recent surge in used car prices indicates that new car sales may soon rise. The theory: a falling supply of used cars and a glut of new cars will lead buyers back to the new car F&I guy. Of course, that assumes that there’s a falling supply of used cars. For that assumption, the MSM turns to . . . new car dealers: “A survey by Wachovia Securities analyst Rich Kwas showed that 42 percent of dealers report ‘too little’ used-car inventory.” Yes, well, they would do, wouldn’t they? As new car sales plummet, franchised dealers’ supply of used trade-ins declines by, oh, roughly the same amount. Or more. 

As TTAC’s Hammer Time’s Steve Lang will tell you, there’s plenty of old iron out there. And LOTS of repos to come. Hundreds of thousands of them. Despite this supply, or because of it, there are some freakanomics in play. Even in this downturn, demand is seasonal. The rental fleets are certainly holding onto their cars longer and order less. But there is little chance of a sustained new car recovery until house prices recover. But let’s not let the facts get in the way of pro-car biz prognosticating.

“There is a very, very interesting inflection point where the financing on a new car becomes more attractive than the financing on a used car,” said Scott Painter, owner and founder of TrueCar.com.

True enough. However, to reach that point, manufacturers would have to dump their new inventory on the market at insane prices. (50 percent off C11 sales?) Of course, if people trade-in their old cars to buy these new cars, the used car supply will increase, which will drive down used car prices and make them more affordable. Making it harder to sell new cars. See how that works?

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22 Comments on “False Dawn: Rising Used Car Prices Do Not a New Car Sales Surge Make...”


  • avatar
    segfault

    Now, if that picture of a sea of beige and white Durangos doesn’t make you want to head down to your local Dodge dealer and buy one at list price with no rebates, you are just downright unpatriotic!

  • avatar
    Bridge2far

    As a matter of fact, used car prices are climbing. A testament to the fact that clean low milegage pre-owned cars are bringing top dollar these days.

  • avatar

    The majority of Used Car sales – I’m willing to bet – are not made at Certified Pre- Owned dealers. They are made in regular Used car dealerships.

    People are only buying used because new buyers/ subprime buyers don’t have the credit to get new car financing.

    The only people buying new cars are high credit/income buyers with disposable income

  • avatar
    EngineeringTheAtom

    Does the rise in new car prices bring a noticeable increase in trade in value of my old car? Or will dealers still play the “well, I’m going to have to wholesale your 70,000 mile 5 year old car” game?

  • avatar
    Lee

    Not only are there a growing number of repo’s on the market, but there is also going to be a huge amount of lease return vehicles as well.

  • avatar
    Lee

    @Flashpoint – Not necessarily true. Finance companies are more likely to finance a customer in to a new car than a used one.

  • avatar
    John Horner

    I don’t think Bloomberg has it all wrong. With sales into daily rental fleet way down and new retail car sales way down, the supply of good clean 1-4 year old cars has to plunge. Meanwhile, cars are still getting scrapped every day. By all accounts, the current vehicle scrap rate far exceeds the new vehicle sales rate.

    Decreased supply normally leads to increasing prices. I don’t have access to the raw data to crunch it, but I bet you would find that prices for desirable lightly used cars are firming up, while prices for undesirable vehicles probably remain week. Off-lease Euro luxury cars are probably still dropping in value. Good used Civics are probably holding strong.

    If the industry ever gets off the mega-rebate kick, used car prices are likely to firm up even more. Rebates on a new vehicle reduce the trade-in value of 2-3 year old similar cars almost dollar for dollar.

    It is also generally true that finance rates and availability are better for new cars than for used ones.

  • avatar
    Boston

    The other option is that used vehicle prices recover for a short period and then go back to where they were after another 30 days or so when the peak Spring season is over. It’s just typical seasonality at work right now, but people are so desperate for good news that we get articles like this.

  • avatar
    Stein X Leikanger

    Several reasons:

    1. Many used cars have become seriously depreciated, meaning people aren’t getting the trade-in they were counting on, and are therefore hanging on to the car longer.

    2. People are finding financing a new car more difficult, and therefore hang on longer.

    This means that used cars aren’t cycling in to the market at previous rates.

    3. All the articles and news coverage about car makers have made customers learn more and think twice. They’ve figured out that cars last a lot longer than they used to, and they don’t have to be replaced that often; and they know that the car makers will “cheat” when building new cars, to make money. Which means that the cars they already built are probably the best we’ll see from these car makers for quite a while.

    Used car prices are rising in Europe, as well, after having dipped seriously last year, particularly on gas guzzlers.

    Customers have also figured out that getting a certified used car means sticking someone else with the initial, major depreciation. I’m with Bailey, who on his blog asks: who is dumb enough to buy a new car, anyway?

  • avatar
    Boston

    I respectfully disagree with you Stein. We wouldn’t see a sudden price correction like this due to some broad change in consumer preferences. Something like that would have to happen over a long period of time. What we are seeing is a sharp recovery over the course of a short period of time. I am still betting that this is a temporary phenomenon. Maybe Farago will post a follow up in the beginning of June to see how this worked out.

  • avatar
    Ronman

    Hi there,

    I wasn’t really interested in the subject above, but there’s something I like to point out.

    Since the fuel price rise from last year, I heard that tons of Americans offloaded their big engined thirsty cars for a either a bus pass or a small efficient car.

    Now when Americans dump their cars, they happen to dump them on ships that cross the Atlantic, venture through the med and off load them in countries like Lebanon.

    I live and work in Beirut, on a street that is infested with used car lots. and all i can see are mid to high range American sourced vehicles, relatively new 3-4 years old. the fences on these lots are bursting with cars, which i suspect were bought at auctions at rock bottom prices in the US.

    Now before the Euro came into play, all cars in the Lebanese gray markets came from where they were made, germans from Germany, Americans from the US and Canada and so on…. but now, all you see are american spec Mercs, Beemers, and everything else including Volvos and Porsches.

    Now the recession hasn’t hit Lebanon yet (it’s coming though), since our banking sector is airtight and credit is very well controlled (as it seems).
    The new car market in Lebanon scored a record hit last year, and the used car market as well, although numbers are not official for the latter. and you can’t tell that used cars are new when they are in traffic.

    [note: Lebanon is a small country, you can tell how a new model is selling just by a 2 hour observation of the coastal highway at rush hour.]

    In any case, when American’s dump their cars they end up on our turf, some are welcome most are not, since most of them are gas guzzlers and not to mention give shady used dealers scores of profit for what may be a repaired near-totaled car.

    my question is RF, you mention above that used car stocks are rising in the US, if we along with Iraq, Jordan and other Mid East countries are getting the American Dump by larger than ever quantities, how many used cars are actually dumped each year in the US? is there a place where we can monitor numbers and stats to how many used cars are shipped from the US to where?

  • avatar
    ronin

    I’m calling BS on Bloomberg. In at least the 3-4 used car models I’ve been watching, I have seen no increase in price.

    They have either remained steady over the last few months, or decreased.

    It’s not like those 8 million people who will not now buy a new car suddenly chose to buy a used car instead. They chose not to buy, period.

    Even the sources quoted are suspicious: Ford Motor Company citing the soaring used car prices. Goldman-Sachs analysts (as though that job title would have anyone believing financial predictions).

    Probably a plant story trying to stimulate new car sales. Since of course that’s the theme of the piece- with used car prices so high, might as well buy new.

  • avatar
    Boston

    Prices are definitely going up – that isn’t really in question. There are always exceptions, but in the aggregate there has been a big price recovery.

    http://www.manheimvalueindex.com/Used_Vehicle_Value_Index/Current_Monthly_Index.html

  • avatar
    aartig

    A car dealership or vehicle local distribution is a business that sells new cars/ old cars at the retail level based on a dealership contract with an automaker. It may also provide maintenance services for cars. Used Car Dealers

  • avatar
    dpeppers

    Haven’t read all responses (flame retardant on). Used cars are drying up. “Franchised dealers are used to selling cars at auction. Not going out and buying them.” statement made by someone who has never worked at dealership. Maneheim Market Report, Black Book (update daily and weekly, not NADA or KBB crap)show big swings to the upside.

    New car franchises do not recieve, even in the best of times, enough clean trade-ins from the consumer. Every franchised dealer worth their salt has a buyer on the road constantly. Where does your revered CarMax get their stock?

    Used Car prices will in fact become closer to the respective new car prices. Hold to your hats now, incentives on new vehicles will decrease over time also. Gone are the days when the “dealer” can go every Tuesday and pick thru 1000 fleet vehicles at Manheim.

  • avatar
    Stein X Leikanger

    @Boston

    Respectful disagreement is much valued.

    But I think there’s a major change in consumer preferences going on.
    Road capacity has not kept pace with number of cars added to streets; fuel prices have gone up; parking and congestion charges is adding to the pain; insurance costs are escalating.

    Far from offering freedom, car ownership has become a hazzle, and is seen as such by an increasing number of people. Add the financial woes to the equation, as well as uncertainty about what car technology will be viable in the future, and I do believe we’re seeing a major change in customer attitudes to car ownership.

    People are hanging back, taking a breather, and buying used instead of new.

  • avatar
    Boston

    Stein – maybe, like I said, it’s hard to say until we get a couple more months of results. I don’t disagree with your statement. I think a lot of us feel like that. But, for all of your points, the decision is really to buy a car or not to buy a car. It’s not really a new vs. used decision. I doubt the possibility of future technology is a major consideration and insurance is only a minor decision. I guess the point is that the used vehicle market and general economy generally move in the same direction. When it doesn’t, it is usually a short term aberration. But then again, I could be completely wrong – we’ll see.

  • avatar
    200k-min

    what car technology will be viable in the future

    One reason I see no point in upgrading today. The engine/electronics in my ten year old car is almost exactly the same as it is in the current model. What’s the point of upgrading?

  • avatar
    Runfromcheney

    I find it ironic to see that huge lot full of unwanted Durangos, because I remember how Hemi powered second-gen Durangos were the shit back around 2004.

  • avatar
    63CorvairSpyder

    ….statistics, statistics. They can be interpreted in many ways, they can be be twisted to mislead, they can be manipulated to get your point across.

    If you look at the Manheim Index, linked above by Boston, you can also come to other conclusions;

    1. The prices(values) are up for Jan and Feb sure, but only from the absymal Nov and Dec numbers. What happened in Nov, the shock and awe of the Obama election, the caving economy etc.

    2. The Jan and Feb prices are still worse than any of the first three quarters of 2008.

    3. The Jan and Feb 2009 prices are worse than any Jan and Feb numbers since 1995.

    It’s kinda like certain politicians saying that to “reduce the proposed(future) increase” in say Social Security is a “cut” in Social Security. Linguistic slight of hand to scare old people.

    That being said, I do believe that used car values over the next few years only have one way to trend and that is up. And it will get harder and harder to find good, low mileage, unabused used cars both late model and older. Simple supply and demand.

    But to use the headline that used car prices are “surging”…… come on. From what, the crappy Nov and Dec numbers?

  • avatar
    Lokki

    I went through this ‘Used cars sales are up – New car sales are down’ drill back in the early 80’s.

    The reasons then are similar to the reason now… nobody could get financing (although then it was because inflation had interest rates at 17 – 20 percent) and new cars then were perceived as having no improvements (in fact they were worse!) than older models.

  • avatar
    sbrown

    Used car prices are going up and it’s a direct representation of the economic crisis. They will recover over time but until then consumers need to think smart and bypass the traditional means finding some bargains at fleet auctions or even wait out the storm utilizing their current form of transport for a while longer.

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