The pandemic has thrown the market for new and used cars totally out of whack.
Cars are flying off of lots as quickly as manufacturers can produce them, and prices are sky-high.
The buying frenzy has people pouncing on cars they never would have considered before.
Cameron Johnson, a fourth-generation car dealer with nine franchises in Virginia, was taught growing up that every morning when a dealer wakes up, their used inventory is worth less than it was the night before.
But in today’s absurd car market, that wisdom isn’t holding up.
A buying frenzy coupled with an historic shortage of vehicles on lots has sent used-car values soaring nearly 30% since last June, according to Edmunds’ automotive research. Over the last six months, Johnson’s Magic City Auto Group has raised prices consistently, and the buyers just keep rolling in.
“I’ve definitely never seen this,” he told Insider. “And I think if you had a group of the smartest people in a room a year ago, no one would have predicted this.”
A massive shortage of computer chips has devastated car manufacturing for months, choking off the supply of new vehicles to dealers. High markups and scant options from assembly lines are fueling a boom in secondhand sales, chipping away at used inventories and driving prices skyward.
Rental-car companies that pared down their fleets when travel ground to a halt in 2020 have resorted to hoarding used vehicles. Meanwhile, low interest rates, a strong economic recovery, and fluctuating travel habits have kept consumer demand high.
It’s completely upended the way car dealers do business.
Lee Walls, a salesman at Grainger Honda in Savannah, Georgia, told Insider his dealership would typically have between 300 and 400 new cars either on the lot or on their way there. Now, he’s down to about 60.
These days, most new Hondas destined for Grainger’s showroom are sold before they even hit the lot – and they’re selling at or near MSRP. The dealership has changed its policy to make deposits non-refundable since so many buyers are clamoring for new cars.
At Magic City Auto Group’s stores, too, cars are snatched up practically as quickly as manufacturers can ship them over. Margins are up and profits are solid, but the money is short-term, Johnson says.
“We’re selling them faster than we can get them, which in a normal world would sound like a great problem,” he said. But he’d readily give up the extraordinary margins for more volume, which keeps salespeople happier and creates more downstream revenue from service and trade-ins.
Everything is selling
With popular models so expensive and hard to come by, shoppers have been loosening their budgets and pouncing on vehicles they wouldn’t have considered before.
Arizona-based Lifted Trucks – which takes used SUVs and pickups, jacks them up anywhere from two to eight inches, puts new wheels and tires on, and sells them through four locations across the state – has broken a sales record nearly every month since May 2020.
Many of its recent customers weren’t seeking out a lifted pickup, they simply couldn’t find the model they were after anywhere else, Chad Staples, the company’s corporate director of training and recruiting, told Insider.
Moreover, vehicles that would’ve languished on Lifted Trucks’ lots in normal times – ones with oddball paint jobs like banana yellow, orange, bright neon green, or Tiffany blue – are selling like hotcakes, Staples said. Desperate buyers are coming from farther away than ever, with one recent customer driving his trade-in from Pennsylvania.
Amid the insanity, margins are up around 30%, Staples said.
Car owners cash in
Dealers aren’t the only ones benefiting from the insatiable appetite for used cars. Used-car owners are cashing in big on rising values.
The average price paid for a trade-in has shot up 75% year-over-year to around $21,200, according to Edmunds. Some car owners stand to make a killing, particularly if they have a vehicle they don’t need. Staples, for his part, said Lifted Trucks has bought back numerous customers’ vehicles for more than it initially sold them for.
Those with leased cars are making out like bandits, too. Peoples’ off-lease vehicles, in many cases, are worth significantly more now than the buyout price they set in their contract years earlier, meaning lessees can essentially flip their leases to another dealer for an instant profit. Johnson, of Magic City, said he helped a recent customer buy out a lease for $40,000, then took the car in on trade for $48,000.
Some people have been making monthly payments and putting miles on cars that aren’t even depreciating in value, Johnson said. “It’s bizarro world,” he said.
New-vehicle supply will only begin to improve toward the end of this year, according to forecaster LMC Automotive, so it could be quite a while before the market evens out. Johnson, for one, believes the pandemic may have changed car buying and selling permanently, as manufacturers realize they can ship out smaller numbers of vehicles with lower incentives.
“I don’t think you’re going to go back to seeing 900 cars on our lot anytime soon,” he said. “The days of coming onto a lot and seeing 50 different Explorers to choose from are far away, if ever.”
Are you a car dealer, owner, or private seller with a story to share about what it’s like to buy and sell cars right now? Contact this reporter at [email protected]
Read the original article on Business Insider