- May 22, 2009
Boom Times Coming in the Used Car Market - Autoline on Autoblog with John McElroy
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.
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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.
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.
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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