It should come as no surprise to anyone with even a slight knowledge of basic economics, that used vehicles are now in short supply and command not-so-bargain prices.
One prime factor in this was the ‘cash for clunkers’ program last year. In essence, it used tax payer capital to gobble up a portion of the affordable inventory and take it off the market…permanently! The accelerated ‘scarcity’ of these vehicles along with a continuing demand for low-cost transportation makes more each remaining lower cost vehicle have more people competing to purchase them, driving up their price. A 2006 Chevy Malibu that could be bought at Auction for $4,500 now can command $6,500. The car hasn’t changed, but the asking price has. Demand is now out-pacing supply all because of a scheme out of the central planning wing of the government.
It’s very much the same thing that happened to real estate in boom markets. The government in all their wisdom, vigorously promoted home ownership via lowered lending standards and used Fanny Mae and Freddy Mac as an instrument to buy up these loans. More people started to compete for product (housing) and as a result, demand out-paced supply…higher prices. We are living the results of that government manipulation of the market and it isn’t pretty.
The used car situation doesn’t have the far-reaching ramifications that the perverted housing market had, but there is still damage that has been done and will be done as a result.
From the Dealer’s standpoint:
For one thing, new car sales will absorb a certain amount of the demand, but, obviously, cannot counter balance the entire situation. If someone can only afford something in the $6,000 range, they can: 1. get less for their money 2. buy nothing or 3. over-extend themselves. For the consumer, all three options are on the negative side of the ledger. For the dealer, options 1 and 3 may not have immediate negative affects, but everything that comes out of government manipulation of markets has un-intended consequences…mostly bad.
For the dealer, equity management becomes even more essential than it has ever been. Products like VAuto, AAX and First Look are even more important to the dealer’s operation than ever before. Everyone is competing more for a shrinking number of affordable used cars, the least you can do it manage the equity as accurately as possible.
The lowest tier of Kia and Suzuki brands (and similar) may enjoy additional new car sales strictly due to their base model pricing and the lack of available lower cost used vehicles. The stage may even be set for Fiat’s product line to receive open arms if it makes it to the U.S. market during this condition. However, low-cost, entry-level vehicles don’t always translate into a positive stream into the used car supply chain later on, as many of them become more disposable than re-usable.
As long as no new scheme is cooked up to pervert the market, we should see supply of used cars gradually come back in line with demand over the next 2 years.