Used Car Sales Are Collapsing — What Happens Next?
Used cars are going nowhere. With almost everyone sitting at home and tens of millions of people losing their jobs, used automobile sales in the USA were reportedly down 64% in the last week of March.
Manheim, the auction company owned by Cox Automotive that passed along that info, expects that prices have been down approximately 10%. For people on the market for a used car, that’s good news. For the people and companies selling used cars, that’s problematic. On a large scale, there are a lot of implications.
Auto companies’ in-house leasing businesses are in the ditch. Vehicles coming off of leases are worth considerably less than these businesses expected when they launched the leases, which in many cases means losing money. It could mean losing billions of dollars.
“Rental-car companies also will get less money from selling down their fleet of vehicles, which are sitting idle amid a global pandemic that’s been catastrophic for travel,” Yahoo Finance reports. Rental car companies have another problem — almost no one is renting a car right now, and getting back to “business as usual” is going to be a long process. With an oversized fleet, rental car companies surely want to dump some cars to help with their finances, but without buyers and with such great depreciation, that’s not a real option.
“General Motors Financial unit had $30.4 billion worth of vehicles leased to customers at the end of last year. If GM Financial needs to boost its estimate of how much those vehicles are going to depreciate in value, each percentage point increase raises the firm’s expenses by $304 million, according to a regulatory filing.”
To put it bluntly, auto companies, rental car companies, and other companies in the automotive ecosystem that had businesses built around used car sales and moderate depreciation are going to need a special bailout — or will likely collapse.
As we’ve reported before, Capital One published a report last year that the Tesla Model 3 was “wreaking havoc on the pre-owned luxury car market.” That means the market was facing a tough trend when it ran into another tough trend. Getting slammed from two sides may be too much for even some giants in this industry to survive.
Two months ago we reported that an iSeeCars report found the Tesla Model 3 held its value far better than any other vehicle on the US auto market. The #2 Ford Ranger’s 11.4% difference in value new versus used for one year was more than double the Model 3’s 5.5% difference. The BMW 3 Series showed a 38.2% difference. While it may take some time for that industry divergence to have a strong effect on future pricing, and especially lease pricing, there’s no way it doesn’t amplify the quickening trend of consumers choosing electric vehicles — especially Teslas — over their conventional, fossil-powered competitors.
We’ll see if the 5.5% difference in price between a new Model 3 and a 1 year old one holds in the coming year or two, but it’s more or less guaranteed the percentages will get worse for other models. On the other hand, one wild card on the Tesla side is the Model Y. As Model Y production ramps up, many Model 3 owners will add another Tesla to the household. However, many may also decide to trade in their Model 3 for a Model Y. That could create enough supply of used Model 3s that its sort of insane 5.5% depreciation record gets hit with a “you’re getting older” stick. We’ll see.
Any other thoughts on used car sales and depreciation in the age of corona?
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