It is the time of the season that used car prices fall off. I began following the wholesale used car market in 1996. I distinctly recall a dealer friend of mine, Jerry McKinney, explaining it to me this time of year “Son you better get your nuts in the nest, winter is a comin’.” Translation: a dealer needs to convert any questionable inventory on today’s market to cash. Then take a new position in fresh inventory after the flop hits.
I coined the term ‘flop’ because, just like Texas hold em, an unknown set of cards that can drastically change your net worth. Dealers have thousands-millions of dollars invested in used inventory. When the market change arrives (typically around the Texas State Fair) the cash value of the inventory you are holding changes. Just as a lake turns over every year, or the rain comes in April, the flop is coming.
The reason I call it ‘the flop’: it’s sporadic, the severity is unknown, and it can claim victims in a heartbeat. Typically, the more expensive (over 27k) units take the first fall, then the edge mile domestics (over 50k). This market adjustment also tends to occur in segments. One segment of the market will fall, then another, then finally the cars that you thought held their value through the flop take a plunge. Town cars, Devilles, 4×4 late model low-equipped SUV’s take a hit on the chops.
I’ve seen the flop take an immediate $10k of value away from a model, and I’ve seen it take nothing. The difference between the good dealers and the not-so-good: their decision making through this annual rapid run that we navigate.
I think this year will catch many with their pants around their ankles. I think the ’09 flop is going to hit much harder than anticipated. Wholesale loss from the dealer perspective will be greater than most dealers are prepared for. This year’s overly heightened market has been managed by the government. Artificial insemination is for livestock; his season Obama AI’ed the auto industry.
The NADA book increased an unprecedented amount in October versus used car sales being off 40% in September across most of the US. Old timers will manage it well. I think the scientific managers may through their computers out the window this season when the algorithms let them down.
There is an art to managing markets. Computers help, a lot, but they do not outweigh experience.
Read more John Wolfe at wolferadio11.wordpress.com
goto http://www.johnclaywolfe.com to stream the radio show saturday mornings as well.
Great post Mr. Wolfe. This is why I love TTAC: the more you read, the deeper down the rabbit hole of the auto industry you go.
Why the hell is Doyle Brunson still in that pot after the flop? The other 2 players had to be betting up a storm.
Stock up on vans or any vehicle folks can live in.
The number of for-sale and for-rent signs are growing hereabouts as people move in with family or friends as income falls or disappears.
As the friction of too many folks crammed together grows some will escape by opting for near-homelessness, perhaps using the abode departed is used as a base for showering, getting phone calls, cooking etc. while sleeping and partially dwelling in a vehicle.
Another step to 2nd-worldness as the USA inches toward oligarchy.
When looking for a used car, I consider NADA and KBB wholesale prices to be the maximum I’d pay in today’s market.
Twotone
google captures this seasonal patterny perfectly…
http://google.com/trends?q=used+cars
http://google.com/trends?q=car+loan
http://google.com/trends?q=honda
With the lack of new car inventory that will be available for the next several months, I predict the fall off to be lighter than last year. Smart dealers will not be so inclined to blowout aging inventory, since replacing it will cost even more due the lack there of. Then there is always Sonic and Auto Nation. You can count on them to make the wrong moves. If there are any huge used car discounts this fall, it will come from those two.
The irony is that right now, if you want to capitalize on your trade’s value (i.e. older desirable car), there’s little/no selection available of new desirable cars- unless you want to order and pay full boat and then some. cars like the mazda5, rav4- moderately efficient family haulers. Now if I wanted an SUV or luxury car, might be a different story. That being said, the used Land Rover LR3 has gone up literally $5-6k since the spring.
What part of the country are you in, obbop?
When you talk about a 10k dropoff…the consumer will actually see this in advertising? or just when you show interest they will be willing to negotiate more. I’m in the market for a used car now, but I’m willing to wait another week or two if there is a good chance of the market dropping pretty big. From what I have seen, you might as well buy a new car, rather than a year old model.
It’s like any industry – try to be ahead of the curve – if you aren’t you better have the resources on hand to take a ‘hit’ at your profits, or be prepared to pack it in.
Very similar to other industries right now, there is too much product floating about out there and not enough buyers.
@macer–no you won’t see it in advertsing as much at dealerships, but you will find it on Ebay etc. Example, if XYZ Chevy has a 4×4 sub they own for 30 grand, asking 32.5 on thier site. Then their buyer grabs a twinkie unit to this one at auction for 24k in November they have a dillema. They cost adjust the two suburbans. Take the 6000 difference, and add 3000 to the fresh purchase, and reduce the older one by 3,o00, then price them on the site at the same dollar amount.
However, if many cases if an independent web-shop that has limited inventory grabs that same suburban for 24k at the sale, you could see it on their site for 25.5, which is cheaper than the new adjusted cost on XYZ bloated dealers site. But you don’t get the safty feeling from buying via a frachise store when purchasing from the indy web dealer.
That’s the reality. Also, the 10k downward swing is a very extreme example. 3-5 grand is more reality on units that get heavily hit on the flop.