By on July 27, 2010

The dogs days of July have been anything but. 83 dealers visited a well-established independent sale this Monday that offered only 93 vehicles. They came to buy and let me tell ya… the dealers paid all the money in the world for some very slim pickings. They had no choice because inventory now is getting near famine levels in the wholesale markets.

A 15 year old Ford Escort with an announcement of ‘Transmission Needs Service’ went for $1200. An even older Bonneville with 188k miles and a multi-colored Caribbean styled exterior went for $1100. Even a 1999 Dodge Intrepid that had a castanet band built into it’s 2.7 Liter engine (think of the sound of a hundred rods knocking) managed to go up to $1000. These are tax season prices for glorified junk that will rarely move in most healthy markets. But even this junk is breaking the four digit barrier…. and that’s not all…

A well marketed and trusted independent auction will have an inventory to dealer ratio of about two to one these days. This is opposed to the four to five to one ratio (five cars per dealer) that had been the norm only a year ago. Dealers that used to visit only a couple of sales a week are now going to four to five sales just to ‘try’ to fill in their inventory needs. Most of them are simply not succeeding. I’m even seeing other auctions buy up inventory at less established sales just to have what they need for their customer base.

What does all this fierce competition mean for the public? Well, with rare exception the used car deals are going to be more difficult to find. On the used car end you’re going to see more dealers who self-finance. They will vary from the Carmax’s, to the Drivetime’s, to the J.D. Byrider’s. But they all have the exclusive focus of maximizing the return beyond common market prices. The large size of these organizations mandate that they find the cars that are needed no matter what. If that means pushing a Miata that sold $4,000 wholesale only a couple years ago to the $5500 range then that’s what will be done. Without inventory they die and they are often traveling several states just to find it.

Even several of the Latino superstores in my neck of the woods have come to the point where they are literally moving the market. The $500 to $2500 wholesale levels used to be the sweet spot for them. Now it’s stretching all the way to the $4000 level and even beyond. A big part of this has to do with the emerging wealth for the savers among them. But also, it’s no longer an uncommon thing to see native English speakers look at the very same vehicles. The increased interest in used cars, much of which is now involuntary, has encouraged some folks to go off the beaten path to find the good deal. Unfortunately the culture of negotiating doesn’t always translate well for these bargain seekers, and I get to hear more amusing stories from these dealers than successful ones in my travels.

The increased competition at the auctions will continue to happen so long as finance companies shy away from an increasingly risky public. A customer that can’t get a loan from a bank or credit union will often forgo the virtues of beaterdom and instead choose to ‘float the note’ with a two to seven year old vehicle. In the end they pay more for the same type of vehicle, and for good reason.

The buy-here pay-here dealers that serve these credit challenged folks experience a much riskier pool of customers than most finance companies. A third of BHPH deals will go south which means that the other two-thirds have to more than make up the difference. The payments are usually reasonable. But the length of payments is getting increasingly long and many customers seem to be completely oblivious towards anything but the look of the car and the monthly payment. 48 to 72 months is now becoming a norm for the higher end vehicles.

How do we stop all this madness? Simple. Take care of your ride. Remember to change the coolant. The tranny fluid. The belts and hoses. Even if it means going a couple hundred in debt. That will pale to a five-figured tombstone of servitude that only happens through ignorance. A few years ago I was a ‘cash’ dealer. Nothing made me happier than seeing someone buy a vehicle for cash that will easily last another seven to ten years with proper care. As much as my work takes me to the BHPH side of the equation these days, I would happily return to that wonderful world of cash if more customers could follow in the same direction.

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20 Comments on “Hammer Time: Indian Summer...”

  • avatar

    I remain hopeful (maybe naively so) that folks will return to a cash purchase situation when it comes to car purchases, or at least finance with a large down payment and short (24 “maybe” 36 months) payment periods. But I’m a realist and know better. All you see advertised now is 60 and 72 month terms. And that’s including very used cars! I feel uneasy even going 36 months anymore…

  • avatar
    Gardiner Westbound

    Canadians are reportedly less impacted by the recession than our American friends. Regardless, finding a decent late model used car here at a reasonable price is difficult.

    I recently bought a very clean, three year old, GMC pickup with 93,000 kilometers (57,000 miles). Paid $1,500 more than would have been the case 18-months ago, and that was after some hard shopping. Bought it from a rural dealer 50-miles from nowhere. There was nothing worthwhile available privately.

    Big city dealers wanted $3,000 more than I paid! The discounts on new ones made paying that much ridiculous.

    • 0 avatar

      Here in BC I’ve noticed used prices rising, and the local auction seems to have fewer and fewer cars every week… It looks like the days of the $200 beater are over.

  • avatar

    Is this a low end of the market phenomenon? Or regional perhaps? I have a 2007 Accord coming off lease – I can buy it for 14k or turn it in. So I checked my Boston area listings for 2007 Accords, there are several dozen available. And the price range for pretty much the same car is anywhere from 15 to 19 grand.

  • avatar

    How soon we forget. Remember that cash for clunkers program? You know the one that incentivized destroying perfectly good old cars to move metal off the lot? Simple supply and demand. Destroy perfectly serviceable cars to help Detroit now leads to a shortage of used cars later leading to…higher prices!

  • avatar

    The 500 pound gorilla in the room is that the middle class is shrinking. With fewer people able to afford new cars, it’s no surprise that the used market has become very tight.

    With the world’s highest percentage of working people who depend on personal cars to get to their jobs, I’m not surprised that BHPH customers are acting as they do. They have no choice.

    The really sad thing is that the profit margins on “serving” the needs of the not-so-affluent are obscenely high. If you peel back the covers, you discover that some of Wall Street’s largest firms are the biggest investors in the companies (payday loans, rent-to-own, etc.) that address this market.

    In “Down and Out in Paris and London”, George Orwell observed that the flophouse he was staying in was more profitable than than the fanciest hotel in town. There’s a lot of money to made from the poor.

    • 0 avatar
      DC Bruce

      I don’t think the issue is affordability; the issue is credit availability. Few Americans are used to paying cash for a care. They finance the car. The problem is, a bunch of government policies have constricted the supply of credit, at all levels of affluence. For example, with the Fed making money available to banks at essentially zero interest rate, which they can invest in Treasury Securities at 3% with zero risk, why would a bank assume the risk of lending money to a car buyer, especially since most new car loans are “under water” for the first year or two. So, a big chunk of what would have been creditworthy new car buyers can’t get credit to buy a new car. This puts them in the used market where either prices are lower (which makes getting a loan easier) or where they can deal with lenders who are comfortable with higher levels of risk (and who charge accordingly). While the gross margins on an individual sale + finance package from a BHPH dealer may look outrageous, I suspect if you look at that dealer’s business overall, he’s not making a killing. The reason is the very high default rates, repo costs and losses on repo’ed vehicles.

      Regrettably, once you get into a pattern of financing cars, it’s hard to break out of it. Say, you’ve been paying $400/month on a 5-year note, by the time the note is paid, you’re probably thinking about a new car. But all you have to fund the purchase is the trade-in value of the old one. Now, if you’d bought that car for cash and paid yourself $400/month during that 5-year period, then you’d have a $20,000 kitty to fund buying your new car, plus whatever the old one is worth.

      But most people don’t do that, usually because they want “more” car at the beginning of their time as car owners than they can afford.

    • 0 avatar

      Good point Bruce. In addtion home equity loans are as unavailable as well. That is how many people financed that $40k car in the driveway. The payment on most home equity loans was 1% of the balance so that new BMW could be bought for a $400 a month car payment. When you finance a car through the dealer or directly through a bank all your $400 a month payment buys you is a low end VW or a Ford Focus.

    • 0 avatar
      Chicago Dude

      DC Bruce,

      Credit availability isn’t an issue anymore – for the well-qualified. Credit got tight for 6 months or so back in 2008/2009, but it’s not a problem now. If you have a credit score above 700, you’re going to get an auto loan at a good rate. Even Ben Bernanke deviated from typical Fed protocol recently when he disagreed with Congress and said that credit access is not the problem – credit demand is as low as anyone has ever seen it.

      People with money and credit don’t want to borrow. People with no money and no credit aren’t even bothering to ask any more (they know what the answer will be).

      I’ve been getting credit and loan offers for the last year at a similar pace to what was happening prior to the credit crisis. But as usual, I throw them straight into the shredder. The money is there for me to borrow if I wanted it. But I don’t.

    • 0 avatar

      +1 for Chicago Dude (I’m in the Chicago area btw as well)

      I have 0% APR for 1 year offers in my Mailbox constantly. My wife as a nanny who has a few credit cards & has never missed a payment in over 2 years gets pre-approved $5k (6 months of income) credit card offers all the time as well.

      We are in position to pay cash for a sub $15k used car, but with a lack of Grand Touring Mazda 5 used options available (I have found tons of sport or tourings very few if any GT’s…) We are really considering buying new. If anyone has a lead on a nice GT Mazda 5 that is say 3-4 years old with 40k’ish miles, please drop me a line.

  • avatar
    Seth L

    So it’s a good time to sell a car, but one would be shooting themselves in the foot if they needed to replace it?

    Catch 22.

  • avatar
    thats one fast cat


    Once again a very fascinating look at the used car world. A question, though.

    Are the prices of higher line vehicles holding steady/depreciating a slower rate? I guess I understand the supply/demand at the lower end of the market, but how about at the higher end? It has always amazed me how quickly expensive marque 4 doors depreciate (Jaguar is one of my favorites, but even the 7 series BMW/S Class Merc aren’t immune). Just a casual look at prices on these cars seems like it is still 2008, where the bottom simply fell out. Is this the case, or is their upward pressure on these cars as well?


  • avatar
    Steven Lang

    Very good question…

    The upper end of the market still has to go throw many of the same growing pains as the lower end. However it’s really a difference among models and brands.

    Some models have been propped up by the strength of the export market. The Lexus LX470 and Toyota Landcruiser are very good examples this. But many of the higher end German cars that are special edition versions have the same reality.

    I’ve tried repeatedly to buy the LX470 for folks who were willing to pay clean book for an average condition vehicle. Couldn’t even touch them. The Arab and even African buyers could outbid me no matter what.

    The BMW 3-series (all models) and coupes have very strong competition at the auctions. Certain Mercedes AMG models and the E500, along with the roadsters tend to do very well. The Audi S4 is very strong. Most of their other models are far less stout.

    The BMW X5 does better than the X3. Mercedes ML’s are a bit weak comparatively. Volvo, Saab, Jaguar & Land Rover are pretty much the bottom dwellers although the nicest versions of these brands have stronger returns.

    Interestingly enough, Volvo and Saab can’t seem to get good residuals in the price territory that Subaru gets into these days. Foresters and Outbacks that hit into the 30’s when new are still holding their value exceptionally well. The only car amongst the Swedes that does halfway decent is the C30… and I suspect that has more to do with limited supply than anything else.

    Lexus and Acura still do well but they are definitely not the money machines they used to be. The LS and ES do far better than the IS, GS, and SC for obvious reasons. As for Acura’s, the more sporty the character the car the higher the residual.

    I know a couple of guys who have been taken to the cleaners on the run of the mill C, E, & S models along with the aforementioned Volvos and Saabs. Depreciation is a strong risk on the high end, and I would say that the financing arms of the Germans and Japanese franchise stores (along with the stronger inventory pool) make this segment of the market far more challenging for the independent dealer.

  • avatar

    I sold my namesake ’97 Ford Escort Wagon at auction in June. I was hoping for a good price and got it.

    It went for $2000 of which I collected $1850 after commission. That is nearly the full retail price.

    It was tan with a tan interior and all power. I put in a JVC CD player after I bought it in 2003.

    I paid $1300 for the car. The CD player was about $100 at Walmart and the special Escort faceplate was about $30 on Ebay. It had 100k on it then and when I sold it, it had 143k on it. No rust to speak of and I detailed it real well before sale.

    This was the best car deal of my life. I’ve never bought a car, drove it for 43K miles and sold it for $550 more than I paid 7 years before. There was a set of tires, brake pads, a rear spring and a new fan belt as repairs.

    But still, I’m happy.

  • avatar


    How do BMW 3 series convertibles do at auction? Do they command less than coupes or sedans since they tend to be more of a weekend toy? What effect do various options do to increase or decrease the price? Thanks in advance for any insight, and I am looking forward, as always, to your next column.

    • 0 avatar
      Steven Lang

      3-Series convertibles are the quintessential Yuppie-mobiles and are considered to be finance fodder at the auctions.

      The late model ones always command a premium. Older ones vary on condition… but they still go for a very healthy penny.

      Best deals I saw today were…

      04′ Mini w/68k for $5300… great car, but it will need at least $700 worth of work.

      07′ Yaris in 4 door, lime green, went for $6700. Roll up windows and a somewhat trashed interior. But it is an automatic and I’m sure the dealer will be able to tote the note with a 5k profit. I think the mileage on it was 40k.

      I bought three… mine were…

      96′ Ford T-Bird in Red with the POS 3.8L but everything works = $450

      01′ Police Interceptor that I ‘held’ at $1500 while the other bidders tried to lowball the State Rep who was selling… sold on the if for $1500. It has 130k. I bid on every single state vehicle that went through the block so they helped me out in the end.

      92′ Sable with a rebuilt tranny and 90k… bought for $700. The interior and exterior are in excellent condition otherwise my bid would have been half as much. I had bought a 95′ for $300 that had ‘Transmission Needs Service’ on the windshield the week before. 400+ miles later the car still shifts perfectly.

      I look at ‘owners’ far more than I do the type of car. Even the worst of cars can sell if they’ve had the best of owners.

  • avatar

    I’m especially curious about Saab, being the owner of a 2008 9-3 SportCombi. A white on white 6spd wagon without heated seats, it sat on a dealer’s lot in Boston for ~18 months. But just what I was looking for!

    GM basically pulled the plug on Saab, the factory was, in fact, shut down. But now they have been rescued. So production was minimal in the 2009-2010 model years, and the deals on new cars last year were pretty insane. I got >$13K off MSRP on mine, and if I had been willing to settle for an automatic I could have gotten >$16K off. 2-year old used Saabs were being held by the dealers when I bought mine at prices that were higher than the new ones – they had to, they had more in them than the new ones were selling for! So I bought a new car with 11 miles on it for the “normal” price of a 2-3yo 30-40K mile used car. What is THAT going to do to the residual value? If the various used car websites are to be believed, it’s still worth pretty close to what I paid for it. I suppose the residuals still look terrible on paper, as they are based on MSRP. But NOBODY paid anywhere near MSRP for a Saab in the past couple years! Has it ever happened that a car company came this close to oblivion and survived?

  • avatar

    America seems to be waking up. A $10,000-15,000, 70K mile 5 year old Honda makes much more sense than a brand new one for twice the price over 4-5 years when you factor in how much less money you will lose in depreciation. The numbers get better the more reliable a car is known to be and the older you’re willing to go (and of course the amount of maintenance you’re willing to do/anticipate).

    Hell, even on the much lower end (~5K) you can find some decent iron now, given your understanding that you will have to do some maintenance. But even still, you probably wouldn’t lose as much skin as if you bought the same car new and kept it over the same amount of time. Funny that it took an economic catastrophe for America to realize this. You go to a 3rd world country, people are still driving Datsuns and Benzes from the 70s. You just have to maintain the cars, and they will run forever.

  • avatar

    Somebody said “a shrinking middle class”….yes indeed. Combine that fact with millions of baby boomers retiring or preping for it. Now you got a whole lot of former “new” car buyers buying used.

    My golf buddy bought a 2007 Tahoe. Sold his mint 03 Impala to his neighbor for top dollar,and bought the Tahoe from a dealer 100 miles from here. This is the same guy that would trade his always mint car in every 4 or 5 years,and buy a new one. He kept the Impala for 7 years and he is shooting for 10 years with the Tahoe.

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