Auto OEMs And Auction Houses Are Colluding To Prop Up Used Car Prices; It Won't Work
We’ve written frequently about the pending collapse in used car prices that will inevitably be brought on by a surge in leases over the past 5 years. With wages stagnant and car prices rising, the only way Americans could ‘afford’ those brand new BMWs and Mercedes was to lease them.
Of course, the math behind how we got here is fairly obvious. The majority of Americans buy cars based on one factor: monthly payment. And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go. Per the Bank Rate calculator below, buying a $30,000 car comes with a monthly payment of around $600 while leasing the same vehicle might only cost $420 per month.
Of course, why buy a $30,000 Ford for a $600 monthly payment when you could lease a $40,000 BMW for $560? You can afford it so long as you can cover the monthly payment, right?
Of course, the problem is that leased vehicles get returned to their originating lenders every 3 years for brand new leases…we wouldn’t want anyone driving around in a 5-year-old clunker now would we? But, as we all know, vehicles have useful lives well in excess of 10 years. Therefore, it doesn’t take too many excessive lease cycles to flood the market with used supply and bring the whole ponzi crashing down.
Which is precisely why American auto OEMs are panicked about the coming wave of lease returns and why they’re colluding with auction houses to help keep used prices higher for longer. According to Reuters, efforts to prop up used car prices include transporting cars around the country to markets where they’ll get the best pricing and basically sitting on inventory to restrict supply.
So major carmakers, including General Motors Co (GM.N) and Ford Motor Co (F.N), are aligning with auto auction houses with aggressive moves to make sure they are getting the best prices for their vehicles. Such maneuvers include transporting the automobiles to where the greater demand is based on real-time pricing data, spending more to spruce up used cars and slowing the pace which leased cars get moved to used car lots or auction houses.
Auto auction houses such as Manheim in southeastern Michigan are where the romance of new car marketing goes to die. The dominant player in the U.S. auction market along with rival KAR Auction Services Inc (KAR.N), Manheim treats vehicles like commodities, grading them on a fine-tuned scale from one (poor) to five (excellent) that provides dealers with certainty and transparency.
Increasingly, the auction houses and automakers are collaborating to try to raise the scores, and the prices, of vehicles running through auctions. Auction houses have offered add-on reconditioning services on used vehicles for decades, but after the lean years following the Great Recession, demand is rising for those higher-margin services.
Of course, putting a rapidly depreciating asset in a storage lot, exposed to the elements, while waiting for prices to recover sounds like a ‘great’ idea.
Meanwhile, a temporary re-balancing of inventory around the country could yield short-term benefits. That said, we do wonder, if there was so much money to be made from selling used vehicles in different markets, why the OEMs just chose to forego those incremental profits until now. Perhaps they were just making too much money? Yeah, that must be it.
For example, the national price for a 2015 Chevrolet Malibu with average mileage the week of June 11 was $15,514, according to data compiled for Reuters by car-shopping website CarGurus.
In Memphis, that Malibu cost nearly 9 percent above the national average fair price, but in Miami it would sell for more than 9 percent below that price, representing a difference of $2,700.
Manheim’s Matt Trapp, whose territory includes the U.S. northeast, says around 40 percent of vehicles coming off leases are returned to dealers within around five hours’ drive of New York City. Many are now being shipped to other regions.
In New Jersey, for instance, one in three off-lease vehicles now leaves the state, Trapp says.
In the end, however, basic math and those pesky supply/demand models tend to work. So, try as they might to delay the inevitable, we suspect used car prices will eventually succumb to the flood of inventory that’s about to hit the market.