By Ray Birch
ATLANTA–Credit unions are being urged to pay attention to additional collateral value risk as used prices remain high and dealers stock more pre-owned vehicles. The recommendation comes as dealers have moved quickly to respond to the pandemic, while at the same time two earlier predictions have yet to occur.
PureCars CEO Jeremy Anspach told CUToday.info dealers are changing the mix of new and used vehicles they have on their lots.
“Dealers are trying to scoop up used inventory at the auction lanes,” said Anspach, who added the wholesale lanes are running normally now. As CUToday.info reported, wholesale auction lanes in late March and April had either closed or were shifting to a virtual model, which slowed the flow of used cars through the auctions.
“Dealers are looking at reallocating their percentage of vehicles,” explained Anspach. “Think of it like a pie chart. A dealership generally has 40% used and 60% new on their lots; we’re seeing that percentage go higher on used now.”
‘Control Their Own Destiny’
Anspach said the moves are being made nationwide by dealers so they can “control their own destiny.” He explained many dealers suffered with low inventory of new, and even used cars during the height of the pandemic in March and April as the result of the slow pace or even closures of wholesale auction lanes, combined with the shutdown of plants by many manufacturers.
“The dealers are saying that if we have another strong wave of COVID-19 they want to have enough inventory on hand if the plants shut down again,” he said. “They want to be able to continue to sell vehicles.”
Anspach said auto dealers are strong entrepreneurs who will find ways to make adjustments based on market conditions and consumer demand.
“For example, if dealers found that subcompact cars were their biggest profit center, you would find truck dealers becoming exceptionally good at selling subcompacts,” he said. “I mean this in a positive way—dealers are very quick to change, pull different levers.”
Strong Consumer Demand
Anspach pointed out that right now consumer demand is exceptionally high on pre-owned.
“During a recession people want to pull back on buying and they see a more affordable option in a used vehicle,” he said.
Anspach added that demand for both used and new vehicles is up now due to the rock-bottom loan rates making payments low.
The current environment is actually driving higher dealer profits, noted Anspach. He explained auto dealers are seeing average grosses significantly higher than a year ago and from the height of coronavirus-related shutdowns.
“For several weeks, the average industry gross, or the gross profit dealers receive from the sale of new cars, has gone up considerably. The average gross was $1,028 for the week ending July 12, compared with just $404 a year ago according to J.D. Power,” he said.
Strong prices for used cars are helping to drive dealer profits higher, emphasized Anspach. The prices are being driven by consumer demand for used.
2 Missed Forecasts
Jeremy Anspach
Amid all that, two things did not happen that Anspach and many other auto industry experts expected would occur and drive used prices down. Car rental companies have yet to sell off a record number of vehicles as consumers limit travel, and carmaker incentives on new vehicles have yet to have a negative effect on used sales, according to Anspach.
For example, car rental giant Hertz, which filed for Chapter 11 bankruptcy, is still expected to sell off its fleet, starting sometime this year.
“When the pandemic hit, manufacturers were so quick to throw big incentives toward consumers with incredibly low interest rates, if any at all. I thought that would continue the acceleration of new car sales and impact the demand on pre-owned. But that has not happened,” Anspach said.
Dealers, according to Anspach, are paying record prices for cars at the wholesale auction lanes.
“What we are hearing from dealers is business is good and that buyers are serious when they're walking into the dealership,” Anspach said. “I think dealerships are running exceptionally well right now, and they're also doing more with less.”
A Word of Caution
Anspach offered a word of caution now for lenders with used car prices high, and many predicting used values will fall sharply. As CUToday.info reported , Black Book this year predicted used depreciation could hit 30% annually by years end.
“I think lenders are taking advantage of the surprising number of transactions that are happening now,” said Anspach. “I think the real question becomes, is the premium on the pre-owned vehicles sold today going to accelerate the collateral’s depreciation and expose the lender to greater risk?”