The Used Car Market Won’t Be Normal Again For Years

There was a time when you could walk into any used car dealership and find a two- or three-year old car in reasonable condition at a decent price. Those days are over, for now. The used car market has continued to suffer from disruptions, going all the way back to Cash-for-Clunkers, and there’s no sign it’s going to improve anytime soon.

While we’re talking about used cars, the Pebble Beach Auction market showed signs of softness this year. Plus, why America’s conflict with China is good news for Vietnam and why Ford may have to recall Mustang Mach-Es again.

Also, I got in late last night from Car Week and I look and feel like a steamed lobster so, yeah, apologies in advance if I screw something up.

The Used Car Market Is So Weird Now

Mid-August is a fun time to look at the car market because it typically moderates a bit, perhaps in the face of people not wanting to walk around a car dealership lot when it’s unbearably hot in much of the country. This is especially true this summer, with average temperatures reaching approximately 9 million degrees.

[Editor’s Note: A bit of an aside, but: There are, of course, tons of factors that go into the seasonality of car sales, including when tax returns show up, when new model-year cars show up, and yes, weather. Here’s a bit about how weather affects buyers, via CarMax:

The farther south the state, the more car sales peak during winter and spring. From a climate standpoint, these are the states that typically avoid harsh temperatures during the colder months. Instead, they are defined by beautiful weather that encourages people to be out driving around, not worrying about shoveling snow out of the driveway, defrosting windows, sleet-covered roads, and other weather-related issues. States located closer to the equator, like Arizona, Florida, and Texas, that are known for year-round sunshine and heat showed the most sales during the winter. Midwestern states, like Kansas, Missouri, Iowa, and Oklahoma, had higher sales trends during the spring months, which is when temperatures are mild and the sun is shining.

Obviously, there’s a lot more to it than that, and now supply chain woes are throwing things out of whack, but car-sales seasonality is interesting. -DT]

Are you willing to melt your ass to check out a five-year-old CRV? In this market you probably are!

Car dealerships make such a fascinating way to look at the larger macroeconomic picture because they’re selling expensive goods with negotiable prices many people require to participate in the workforce and, yet, are often purchased emotionally and typically require financing.

Right now we’re in the wacky season because used car wholesale prices in the first half of August actually ticked up 0.1% month-over-month while, in general, used car prices are down across most segments according to Manheim/Cox. As new cars become more available and prices come down there’s less room for used cars, so dealers are starting to cut back on their supply. What’s going on here?

Here’s an important bit from Automotive News:

Bleaker used-vehicle supply comes as dealers also work to reconcile their operations to a macroeconomic environment characterized by wholesale pricing volatility and demand dampened by higher interest rates.

Sticking to a smaller supply of 30 to 45 days is an increasingly important practice for franchised dealerships as floorplanning expenses have grown, Long said. Dealers want to avoid overstocking used vehicles to minimize the risk of values falling before they can sell them, Ricart said.

That’s all well-and-good until dealers find themselves short of cars and then have to go out and find more. As pointed out this morning by CarDealershipGuy in his email newsletter:

This happens because dealerships are running on lean inventories to reduce their risk exposure and lower costs. However, when business shows signs of picking up, dealerships are panicking to resupply their lots, driving the prices up.

So, yeah, it’s going to be weird for a while. But I want to focus less on the month-to-month and more on the larger picture, because month-to-month volatility is nothing compared to the long-term issues the market has to contend with for at least the next two years.

Here are some key factors:

• 8.1 Million, that’s the number of cars that weren’t sold in the United States between 2020 and 2022 compared to the prior two-year period according to Cox Automotive. This, of course, was due mostly to the pandemic.
• 12.2 years, which is the average age of cars on the road, according to S&P Mobility. This is a record number.
• -2.5 million, which is the number of lease maturities (when leases end) expected from 2023 to 2025 when compared with 2020-2022.

That last number comes from the Automotive News story I linked to earlier, which includes this great quote:

That gap in supply will slowly move down the timeline, iSeeCars Executive Analyst Karl Brauer said.

“It’s like a snake that eats something giant,” he said. “That bulge doesn’t ever really go away. It just slowly moves down the snake. That’s what we’re in.”

I wish I’d have thought of that analogy. It’s true, though. Think about it this way: If it takes 2-to-3 years for most leases to mature and we’re going to be losing more than two million leases over that period, even if leasing suddenly rebounded today it would take until 2025 at the earliest to have those post-lease vehicles appear on the market.

All of these factors, plus Trimflation, mean that we’ll have fewer good quality used cars available in the long-term and the ones we’ll get will probably be more expensive to purchase and own.

This sucks if you want a used car, but I still think it’s a big opportunity for someone in the new car market to sell something that the market wants (a compact CUV) at a reasonable price and pick up a lot of marketshare.

The Pebble Beach Used Car Market Also Wasn’t Great

Last year was a record year at Pebble Beach, but this year the sales were softer. We all spent a lot of time in the RM Sotheby’s auction and the room felt a little quieter than the prior year, though we did personally drive the price of Frisky microcars way up.

Our pal Hannah Elliott at Bloomberg has all the details:

By the end of the weekend, total sales reached a little more than $400 million across five auction houses, including after-sales, down from $473 million last year. An average sell-through rate of just 68% for 1,225 vehicles fell short of the 78% rate from last year, when there were 1,023 on the block. A sell-through rate of 80% or more is considered healthy for a car auction.

Average sale prices faltered, too, dropping to $477,981 from $591,768. Several Ferraris struggled, even though they’re largely considered market-proof. At Bonhams a 1967 Ferrari 412 P took $30.2 million after a lackluster show of bidding, far less than the expected $40 million. A 1964 Ferrari 250 LM at RM Sotheby’s reached a high bid of $17 million—but missed its reserve and didn’t sell at all.

Funny story about that: I actually bumped into the seller of the most expensive car at Pebble this year and got to chat with him about the sale (everyone is keeping his name out of it so I will as well, but it’s not hard to figure out who it is). He was as calm as ever and didn’t seem too bothered by the sale, pointing out that $30 million is still $30 million dollars.

What’s going on here? Are people afraid of a recession? Are high interest rates hitting even the uber-wealthy? There’s probably some of that, but I think that after years of record corporate profits driving money into the hands of the 1% that a lot of the really great condition cars have sold and people are getting pickier about what’s left.

Japanese cars are becoming more collectible, but there were still very few for sale this year and it wasn’t quite the crowd for them anyway (most good Japanese cars seem to end up on the web). It seems like the one place where the market is still strong is for prewar cars, which makes sense as it’s one easy way to win an award at the Concours (especially if they’re German… for whatever reason).

Vietnam Is The Perfect Hedge Against China

The ongoing will-they/wont-they between China and the United States is making it harder for firms who rely on China for turning their rare earth materials into things like the magnets we need for phones and wind turbines and, oh, cars.

You know which company has a ton of rare earth deposits, is pretty close to China, and hasn’t gotten its processing industry together? Vietnam!

Go read this Reuters article that breaks down everything that’s going on here:

U.S. officials have signalled growing interest in Vietnam’s rare earths potential amid discussion to upgrade bilateral ties this year, and South Korea signed a deal with Vietnam in June to boost its supply chain of critical minerals.

Magnet makers are also drawn to Vietnam by low labour costs and market access afforded by multiple free-trade deals. They also want to move closer to Vietnam-based clients, such as automakers and electronics firms, which are increasingly wary of over-reliance on Chinese supplies as relations worsen between Washington and Beijing, industry insiders said.

Vietnam is the only country beyond China with all stages of the magnet supply chain, from mining rare earths to downstream production, said a Vietnam-based industry consultant, who was not authorised to speak to media so declined to be identified.

Of course, it’s going to take a while for all of this to come into play, if it ever does.

Did The Mustang Mach-E Recall Actually Work?

The transition to electric cars isn’t going to be easy, and the otherwise pretty good Mach-E is a case-in-point. Last year Ford recalled all of its cars due to the possibility that the electric crossovers could just stop working. Why? The reason was pretty great:

Direct Current (“DC”) fast charging and repeated wide open pedal events can cause the high voltage battery main contactors to overheat. Overheating may lead to arcing and deformation of the electrical contact surfaces, which can result in a contactor that remains open or a contactor that welds closed.

A “wide open pedal event” is when someone slams on the skinny pedal which, if you have an EV, you’re doing a lot for funsies. Unfortunately for Ford, people keep complaining this is happening after the recall, which involved a software update that was supposed to lower battery temperatures to avoid this happening.

Per the Detroit Free Press:

At issue is how Ford has handled the recall and whether it implemented an effective remedy. An estimated 64,727 Mach-E vehicles are covered by the investigation, according to an Office of Defects Investigation document filed with the National Highway Traffic Safety Administration. So far, 12 reports have been put forth from consumers whose vehicles had been reportedly fixed but the fix didn’t stop the problem, said the report, dated Aug. 17.

Not great.

The Big Question

Have you purchased a used car lately? How? If you were to purchase a used car, where would you look?

Photos: Author, Ford, Sumimoto, Cox, Penske Cars