Autoline on Autoblog with John McElroy
by John McElroy on May 22nd 2009 at 9:29AM 
BOOM TIMES COMING IN THE USED CAR MARKET
The future looks so bright for the used car market that I'm almost tempted to try and get into that business myself. Even though car dealers are going through tough times trying to sell new vehicles, they are going to more than make up for that on their used car lots.
The reason I'm so bullish on the used car business is that we're facing a looming shortage of good used cars. First off, the new car market has fallen by roughly 7 million units since its peak two years ago. That translates into 7 million fewer trade-ins available in the used car market. And the story gets even more interesting when you start to dig down into those numbers.
Follow the jump to keep reading...
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John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
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Daily rental companies used to buy about 2 million new cars per year. They put about 20,000 miles on those cars then sold them back to the car companies, which in turn would auction them off to dealers. Those were a primary source of certified used cars, which are put through an inspection and refurbishing process, and then resold with a one-year warranty.
But with the Great Recession raging, there are fewer business travelers and fewer vacationers who need to rent cars. And buying all those cars is a massive expense for those daily rental companies. So they're now going to buy half as many cars and the ones they keep they'll hold onto for up to 40,000 miles. Ergo, there goes a great source for certified used cars.
The same goes for commercial fleets, made up of government agencies and large corporations, which bought about a million new cars a year. They're going to buy half that many going forward. Again, fewer good used cars to choose from.
During the last decade there were about a million new new-car customers with low credit scores who were able to get car loans. In today's climate, they're not going to be able to get those kinds of loans anymore, meaning there's a million more people who are going to be driven into the used car market every year.
With people worried about losing their jobs, with so many people taking pay cuts, and with savings accounts taking big hits, more and more people are going to turn away from the new car market and start looking at used cars. It's hard to say how many people fall into this category, but it's probably safe to say it's over a million.
Oh yeah, one more thing. We are now scrapping used cars at record rates, roughly 14 million vehicles a year. And we're selling fewer than 10 million new ones right now. That means the U.S. car fleet is starting to shrink, probably for first time since the Great Depression.
Okay, when you add it all up there are going to be millions of consumers turning to the used car market at the same time there's going to be millions of fewer good used cars. It's easy to see what's going to happen. The prices of used cars are going to go up. You watch, there's going to be an all-out bidding war between auction houses and even between dealers to try and get their hands on the best used cars out there.
For well over a decade now, new car dealers have made more profit selling used cars than new ones. And now the used side of the business is going to become even more lucrative. I imagine that a bunch of Chrysler and GM dealers who got THE LETTER last week informing them that they were losing their franchises will now turn their stores into used-car lots. In a way I kind of envy them. That business is about to explode.
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The future looks so bright for the used car market that I'm almost tempted to try and get into that business myself. Even though car dealers are going through tough times trying to sell new vehicles, they are going to more than make up for that on their used car lots.The reason I'm so bullish on the used car business is that we're facing a looming shortage of good used cars. First off, the new car market has fallen by roughly 7 million units since its peak two years ago. That translates into 7 million fewer trade-ins available in the used car market. And the story gets even more interesting when you start to dig down into those numbers.
Follow the jump to keep reading...
____________________________________________________________________________________
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
____________________________________________________________________________________
Daily rental companies used to buy about 2 million new cars per year. They put about 20,000 miles on those cars then sold them back to the car companies, which in turn would auction them off to dealers. Those were a primary source of certified used cars, which are put through an inspection and refurbishing process, and then resold with a one-year warranty.
But with the Great Recession raging, there are fewer business travelers and fewer vacationers who need to rent cars. And buying all those cars is a massive expense for those daily rental companies. So they're now going to buy half as many cars and the ones they keep they'll hold onto for up to 40,000 miles. Ergo, there goes a great source for certified used cars.
The same goes for commercial fleets, made up of government agencies and large corporations, which bought about a million new cars a year. They're going to buy half that many going forward. Again, fewer good used cars to choose from.
During the last decade there were about a million new new-car customers with low credit scores who were able to get car loans. In today's climate, they're not going to be able to get those kinds of loans anymore, meaning there's a million more people who are going to be driven into the used car market every year.
The U.S. car fleet is starting to shrink, probably for first time since the Great Depression.
Ironically enough, repossessed vehicles also represented a good source of used cars. But most repos take place in the first 12 to 24 months of a car loan. And since the big economic melt down started a year ago, that means there will be fewer repos going forward.With people worried about losing their jobs, with so many people taking pay cuts, and with savings accounts taking big hits, more and more people are going to turn away from the new car market and start looking at used cars. It's hard to say how many people fall into this category, but it's probably safe to say it's over a million.
Oh yeah, one more thing. We are now scrapping used cars at record rates, roughly 14 million vehicles a year. And we're selling fewer than 10 million new ones right now. That means the U.S. car fleet is starting to shrink, probably for first time since the Great Depression.
Okay, when you add it all up there are going to be millions of consumers turning to the used car market at the same time there's going to be millions of fewer good used cars. It's easy to see what's going to happen. The prices of used cars are going to go up. You watch, there's going to be an all-out bidding war between auction houses and even between dealers to try and get their hands on the best used cars out there.
For well over a decade now, new car dealers have made more profit selling used cars than new ones. And now the used side of the business is going to become even more lucrative. I imagine that a bunch of Chrysler and GM dealers who got THE LETTER last week informing them that they were losing their franchises will now turn their stores into used-car lots. In a way I kind of envy them. That business is about to explode.
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Reader Comments (Page 1 of 1)
Alex 9:42AM (5/22/2009)
great, as if that 2001 Impreza RS i want wasn't over-priced as is.
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The Other Bob 10:03AM (5/22/2009)
Good article John.
I also think used cars are going to go up in demand as the prices for new cars rise from the additional fuel efficiency equipment being added to cars by mandate.
In the not too distant future, it may be impossible to buy a mid-sized sedan without a hybrid drivetrain. This means the average Malibu or Fusion could be $28,000. The days of new, sub $20K nice sedans may be over, making used cars look real attractive.
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Silly Pickle 9:51AM (5/22/2009)
I've noticed some time ago that car's like the Taurus (ie like my 2000 model year) and Impala sold for higher prices in the US than they do in Canada (or at least the asking prices are higher or the same - which is nuts!!). So, what I should do is gather a few of those, and sell 'em down south! My $1000 342,000 km Ford just became a gold mine! I can probably get 2thou in the US!! Whopptee-wooo!!! Here I come! US cash only!!
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John 9:54AM (5/22/2009)
You are right John. There are several good reasons the used car market has a bright outlook:
- With the government subsidizing new car purchasers with their "cash for clunkers" program, it will reduce the pool of used models increasing values
- With the tough new fuel standards forcing the production of small economy cars, people will increasingly look to older models as performance and horsepower of new models drops off.
- People are less willing to risk purchasing a more expensive new car and get upside down in their loan.
- The quality and reliability of used cars has never been better.
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GT-1 10:00AM (5/22/2009)
While this may be true to some extent. You're assuming all of this on current sales and economic conditions. Both of which will improve. Hopefully.
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mitchw 10:00AM (5/22/2009)
Hopefully, this will shore up the parts suppliers and repair shops. My eight year old honda isn't deteriorating at all. Only emotion or a big crash makes it rational to change.
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imirk 11:52AM (5/22/2009)
you mean only a big crash makes it rational to change because emotion would be an irrational reason to change
ronEbear 10:12AM (5/22/2009)
I`m happy that I bought a new Hyundai Accent. A used car on the same lot was already more expensive.
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cmetom 10:33AM (5/22/2009)
@silly pickle: the cars in Canada are worth less because USUALLY they have more damage from / potential for / actual rust due to the bad winters, road salting etc. In the northern parts of the USA I'm sure the used car market is much the same as they great white north.
Similarly in Australia, with no snow except in one area of the whole country and winters that mostly don't dip below 0C / 32F, cars last longer and are more reliable because the climate is more ideal for keeping them long-term. That's why the new car market is slower in Australia and all cars cost more (ignoring the import & currency exchange rate issues for foreign-made cars).
@John McElroy: I understand your reasoning and of course it looks at the bigger picture of the used car market. In one (and I'm sure multiple) case though, it doesn't hold up - perhaps that will change with the current economic climate, but sometimes it's cheaper to lease-to-buy a new car (certainly month-to-month) with the deals they give (approx. 0 to 2% interest) than it is to get a bank loan and buy a used car (at +5% interest). Something to consider depending on the costs of new vs. used and people's situations and the deals they can get.
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Patliean1 10:34AM (5/22/2009)
Exactly which used car was more expensive?
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prisonerofcs 10:55AM (5/22/2009)
If the economy does not improve it doesn't matter if dealers costs go up, they will not be able to transfer that cost to the customer without decreasing sales. As a result all this will do is make it increasingly difficult for used car dealers to make a profit. Especially if the government subsidizes Chrysler and GM. When you can buy a new car Malibu for under 20K, no used car dealer will be able to sell an identical used Malibu with 30K miles for $19999, it doesn't matter if it sold for $26,000 new. Today I drove by a used car lot in a good location, that has changed hands and closed for the 3rd time this year. If anything, I believe many americans will start keeping there cars longer. In Europe people keep cars for more than 10 years on average, I think this will be the future for America. Find a good car, put a good stereo in it, and keep it running.
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JZeke 1:19PM (5/22/2009)
So you're saying, if you have a good used car, and were looking to get into a newer one... I'll make more holding on to it, but I will also have to spend more to move into a newer car?
I have an 03 WRX wagon, pretty cherry condition with 107k on the odo. At the market bottom this prolly would have netted $7000 easily. Ive considered getting a newer used Subaru (or something similar), since I own the car and used prices are low. Are prices for buyers and sellers going to move up in parallel? Or will there be some lopsidedness going on with dealers selling cars for far more than they give to trade-ins, or in private party transactions?
Oh what to do... lol.
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Vincenzo 1:33PM (5/22/2009)
Who needs a used car from the Era of huge gas-guzzling SUVs, trucks, and boring Camries? Especially, when the proportion of cars/population in America is 9/10.
And the gas prices have been going up since Bush left the office ($1.50).
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Farris 3:20PM (5/22/2009)
"And the gas prices have been going up since Bush left the office ($1.50)"
Yeah, and that has nothing to do with the fact that it was winter then and summer now, right?
Why not look at it this way: "The highest prices that we ever paid for fuel were during the Bush-era." The logic is just as flawed.
Glenn 1:45PM (5/22/2009)
Here's another factoid. The AVERAGE age of the U.S. automobile fleet is nearly 9.5 years right now - and again, the figures are 14 million cars being scrapped every year and now the figures are closer to 8.5 million vehicles being sold new this year, not 10 million.
One more factoid. With President Goodwrench throwing a spanner into the spokes of the (somewhat) free market and soon mandating smaller cars, and vastly better MPGs, it won't take long to have new car pricing more like the UK's than what we've seen.
Figure double the price, ignoring inflation, and you get the picture. Within maybe 5 years.
In some ways, going into the used car biz right now seems insane. But the underlying signs are actually pretty good.
The other thing which I foresee is the Chinese and Indians bringing new cars into this country within 5 years, more likely after the next election if Republicans get in (assuming they have spine enough to shut off the money-tap to "Government Motors" and "American Leyland Crisisler", of course).
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yoderizer 11:19AM (5/23/2009)
Where did you find that scrappage number? I've heard it's more like 10.5 million.
Aubs 3:37PM (5/22/2009)
Having just LEFT the used car business, I can tell you that not a single dealer I know is excited about the future used car market. Why?
Because no one has any spare money, everyone is losing their job, and they're also pessimistic about the future. And these figures are not expected to improve. So if people are already having a hard time affording a used car, then it's only going to get much worse in the future.
What's my opinion? People will simply STOP buying vehicles. They'll hold on to what they have until it falls apart. Because suddenly those old cars that cost more to repair than they were worth are now going to be well worth the effort.
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Tina 7:21AM (5/23/2009)
Aubs, your'e right. I've decided to keep the expedition that needs a heater core done and a vacuum leak fixed. The heater core is a 7 hour job AT 75 dollars a hour. I'm not sure yet what will be the cure for the vacuum leak and how much monies but the repairs are more than what the vehicle is worth.
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