Hammer Time: Feeling Used

Steven Lang
by Steven Lang
hammer time feeling used

Wholesale heaven used to be a crowded place at the dealer auctions. There were Taurae aplenty. Neons, Stratuses, Sables, Sebrings, Optimas, Milans, the names were as endless as the need to keep all the factories humming. Even in the ‘somewhat’ good old days of 2004, the average vehicle that sold for $5,000 at a sale usually had only about 70 to 75k on it. But now it’s a different auction world.

In 2010 we’re surpassing the 100k mileage mark for the $5,000 vehicle… wholesale. This is according to the folks at Manheim Auctions who are pretty much the 800 pound gorillas of the auction industry. There are new constraints in price, selection and even access to the vehicles. None of which are a good thing for those looking for ‘the deal’. Here are just a few of the major forces coming straight for the dealer’s jugular from the wholesale level.

Rentals: 1,000,000+ fewer vehicles are being brought to the dealer auctions. Last year it got to the point where the average rental car was being kept for 16 months. Think about that for a second. In an industry where a 6 to 9 month average was considered to be the norm only two years ago, you now have a doubling of the rental period. That segment represents a far larger portion of the late-model inventory than anything outside of the manufacturer’s online inventories… which are often first offered only to the franchise dealers. A surprising number of cars that were once the auction’s bread and butter are now simply shucked online at a far lower cost.

And yes, it gets worse… for the auctions. A lot of these rental companies are trying to retail these vehicles themselves. No need for auctions. No wholesalers. No bulk purchases from large buy-here pay-here dealerships to drive the ‘per vehicle purchase price’ down to a four figured loss. Rental companies have less access to capital to replace their fleet so they simply aren’t buying as much. They really don’t need to. In these days of repos aplenty… the rentals now command a price premium at the wholesale and retail level.

Manufacturers: GM and Chrysler are far less concerned about capacity utilization due to bankruptcy. I’ll avoid the ‘laissez-faire vs. lazy shit’ argument and simply say that both companies are now far more competitive on the balance sheet. There are no longer as many union contracts, pensioners, dealers or brands. That’s old news in these here parts. But the real shocker is… nearly everyone else has the same exact attitude.

Thanks to ‘Cash for Clunkers’ new car inventory levels quickly reached their lowest point in 35 years. They have come back up.. a bit. But not anywhere near to the point of 2007 and 2008. So far this year retail has only gone up 12% from the abyss that was 2009. But manufacturers are no longer trying to cram every space at the dealership with vehicles. Is this due to a newfound belief in retail business vs. fleets? No. The market has become far more risk averse and the surviving financial firms along with the manufacturers that once rubber stamped the inventory are now adjusting to it’s expectations. This means you will likely see far more leasing in the next few years… and far fewer models.

Consumers: You may believe that the discriminating John, Jane or Jim would be getting the better deal today. It is a recession after all. But nope. Not even close. The used car are simply trying to make the older vehicle look like the better one. Remember the 100k car at the auctions? It’s now getting a lot more repair and detail work. Reconditioning costs have more than doubled since 2007 which means that a part or two in your next ‘pre-owned’ car may be newer. But you are having to pay more for every recently detailed part attached to it.

Used car dealers have been able to pass on most of these costs due to the fact that the supply side has constrained considerably while demand has remained strong. The 2.5 to 1 ratio of used cars vs. new has ballooned over the past year to 3.4 to 1. There is no longer any social stigma in buying used, which means that dealers are trying to keep every good used unit they can get.

Yet there are fewer cars and far fewer ‘strong’ buyers. Fewer trade-in’s. Fewer cash buyers and those with decent credit.. Fewer rental and off-lease vehicles. Fewer of everything… except repos. But the auctions don’t always see those vehicles anymore either.

Finance companies are trying to reward dealers with access to their ‘repo’ inventory. The more paper you generate for the finance company. The better choice and availability of vehicles you will have in the end. This to me is interesting because it shows a lot of these companies believe that forming alliances with specific dealers is more profitable than the free markets that are at the auto auctions. In the case of the finance companies and dealerships… these alliances are strictly voluntary and synergistic. With the dealer and consumer? Anything but… because a surprising number of consumers are screwing themselves into a credit corner.

A lot of folks are simply taking the ‘$399 down and 48 months’ package of the ‘buy-here pay-here’ dealerships because they simply believe they must have a ‘reliable’ late model vehicle. In many cases I’m seeing finance terms as long as 72 months with $250 monthly payments for vehicles that often go for the $6k to $7k level wholesale. That’s madness. Six years of servitude for a vehicle that is often already five to seven years old. No wonder why our country is going to shit.

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  • George McNally George McNally on Jul 22, 2010

    I recently bought a used 2003 Taurus SES from Verizon off a used car lot.. 160k miles, full service history, new transaxle, new water pump,etc....full leather interior,24 valve engine, fair paint, no dents. I think I stole it for 2700 bucks. I did a Carfax and the used car guy never looked in the glovebox where I found all the records and had no idea where the car came from or the full service history.

  • Slance66 Slance66 on Jul 22, 2010

    I've hit several dealers looking for CPO's recently. There are not a lot of deals to be had. I have always paid cash, and there is no easier way to observe the folly of overspending than to look at lease-trader. I am shocked at what some people pay per month for a car. Others in my income bracket are leasing expensive German cars, and yet I can't bring myself to even pony up for a used 528xi, when I can get a used Acura TSX for so much less. A current generation Honda Civic is a fantastic car when compared with almost anything from 15-20 years ago. ABS and air-bags used to be luxury items, hell even A/C, CD players and power windows were "luxury" items. Now every Kia has those standard. We've become spoiled and I cringe when I see kids just out of college wasting money on a 3-series lease instead of buying a used Scion and saving.

  • FifaCup Loving both Interior and exterior designs.
  • FifaCup This is not good for the auto industry
  • Jeff S This would be a good commuter vehicle especially for those working in a large metropolitan area. The only thing is that by the time you put airbags, backup cameras, and a few of the other required safety features this car would no longer be simple and the price would be not much cheaper than a subcompact. I like the idea but I doubt a car like this would get marketed in anyplace besides Europe and the 3rd World.
  • ScarecrowRepair That's what I came to say!
  • Inside Looking Out " the plastic reinforced with cotton waste used on select garbage vehicles assembled by the Soviet Union. "Wrong. The car you are talking about was the product German engineering, East German. It's name was Trabant.
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