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Today's topics:
💰 Cars and deals - Where to find them
💵 Record profits come with a big price tag for dealers
🏈 Dealers and shoppers are playing on the same team
🔦 Digging deeper into financing shenanigans
Reading time: ⏱ about 4 min 22 sec
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💰 Cars and deals - Where to find them
Looking for a new car? Here’s where to find availability: Cox Automotive reports that full-size pickup trucks from domestic automakers are back to almost pre-pandemic inventories.
Lincoln, Buick, and Audi have the most availability of larger luxury cars. Ram, Jeep, and Dodge (Stellantis brands) have the most non-luxury cars. For example, Chevy Silverado, Dodge Ram, and Ford Explorer prices are down about 10% from November of 2021.
Toyota, Kia, and Honda have the lowest inventories and their prices will remain inflated.
Here’s a helpful chart that shows which brands’ supply is limited, hence dictating price premiums, and which ones are plentiful, where discounts as becoming common:
Cox, Wolfstreet
Prices are dropping faster on older cars. These cars have been appreciating more rapidly than younger used cars, and the trend is reversing now because they are harder to finance and because consumers are not keen on splurging for old platforms and tech. This trend will continue in 2023.
If you’re having a hard time finding a new vehicle, consider a certified pre-owned one. Some CPO programs are heavily supported by manufacturers with lower interest rates and cash incentives. CPO cars are backed by new-like warranties and have to undergo strict inspections to get certified.
💵 Record profits come with a big price tag for dealers
The nationwide dealer survey conducted by Wards Intelligence reveals a few insights on dealerships challenges in 2022. Survey respondents listed these top 3 factors negatively affecting dealerships in the past year. They are:
Inventory shortage
Rising vehicle prices
Staffing shortages
When asked about what will deliver the most positive impact next year, dealers said that they want:
More inventory
Improved economy
Improved sales, financing, and service experience
Low supply and high demand boosted dealerships’ profitability to record levels in the last year. The shortage of new cars resulted in the shortage of used ones, hence higher prices. Longer consumer upgrade cycles brought more revenue from service centers.
Total profit per new unit (including ancillary products and finance and insurance income) is on pace to be over $4,100 (per Wards Auto). That is down about 20% from a year ago, but still more than double 2019 levels.
So why do dealerships yearn for more inventory when they can reap record profits per unit? They see clear signs of customers being turned off by the limited selection and markups. Dealerships are coming to realize the impact of the affordability crisis, which may become worse if the recession expectation comes true.
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🏈 Dealers and shoppers are playing on the same team
Let’s talk about shoppers now. JD Power’s recent study of car shoppers highlighted the following trends:
Satisfaction with the dealership experience fell for the first time in more than 10 years. Here’s why: shoppers are not happy to pay additional markups over MSRP. The satisfaction index of people who paid MSRP is much higher than the one for those who paid above it.
Shoppers are ok with ordering and waiting: people who placed custom factory orders were happier than those who bought what was available on dealerships’ floors.
Car shopping is migrating towards the online-only experience: 15% of shoppers did not enter physical stores during their buying journey.
Alfa Romeo, Porsche, Lexus, Buick, and Dodge are leading in customer satisfaction ratings, while Genesis, Hyundai, Kia, Volvo, and Audi are at the bottom of their respective categories.
So are dealers and shoppers in the same boat?
Both dealers and shoppers will benefit from improved inventories: with or without markups dealers need cars to sell and buyers need cars to buy. Availability is gradually improving as chip shortages and supply chain issues are resolved. The new-cars supply is 81% higher than a year before but is still below 2019 level by almost 2 million units. The used car supply is 4% higher than last year.
Paying markups over MSRP for new cars is still happening in the lower-priced segments of mainstream vehicles, however for the first time since July 2021 average transaction price is now below the average MSRP, indicating that more cars are selling at a discount than at a premium.
Used retail listing prices are now 2% lower than last year, but prices are still way up, by about 30% from pre-COVID levels. Cox Automotive predicts above-normal depreciation of used car values in 2023, and J.P. Morgan is expecting used car prices to fall by 10% to 20% in 2023, while new car prices are expected to dip 2.5% to 5%.
BlackBook
Both dealers and shoppers are hurting from the situation with financing. Interest rates are sky high (and Feds are not done raising rates yet), making payments unaffordable, which pushes some shoppers out of the market. On top of that, lenders are becoming more conservative and are tightening their credit policies. Dealers are losing access to lenders, while consumers are not getting approved for loans. The number of cash buyers is growing and has reached over 20% for new cars and over 62% for used cars. Credit unions have stepped in with lower rates and easier approval, but they lack scale and technology to replace traditional lenders.
Not having access to financing dampens demand, resulting in slower sales, which can play into the consumer's hand. As vehicle supplies improve, manufacturers will address the slowing demand by offering special financing and cash back incentives in order to move inventory.
Consumers indicated the willingness to wait for their custom-ordered cars, and dealerships are happy to pre-sell a good portion of their available inventory allocation. However, more inventory means that cars will spend more time sitting on dealership lots. J.D. Power reports that in December, 47% of vehicles will be sold within 10 days of arriving at a dealership, down from a high of 57% in March. The average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 23 days. That’s up from 18 days a year ago.
The number of days spent on dealership lots is climbing for used cars as well:
BlackBook
So what’s the takeaway? Dealers and shoppers actually do want the same things: more inventory, lower rates, and easier access to financing.
Both dealers and shoppers are at the mercy of manufacturers, who are in an interesting position. As they anticipate a lower demand due to the recession they don’t want to overproduce. At the same time they are yet to cover the inventory gap of over 1.5 million units created by supply chain issues and chip shortages.
Manufacturers also missed the boat by putting their bets on big and expensive vehicles, while abandoning cheaper and more fuel-efficient segments that are now in high demand due to raising fuel prices and high interest rates.
🔦 Digging deeper into financing shenanigans
I promised to dig more into what’s happening with financing. I went through our records, loan by loan, and here’s what I found:
I suspect that lenders are playing with the DTI (debt-to-income ratio) and are approving consumers with higher DTI, while making an impression of tightening in other areas. My F&I team has shown that underwriters are more lenient towards approving loans for customers with a higher DTI or towards waving the existing auto loan stipulation, especially after having a phone conversation with the store. The thought is that if a customer defaults on the pre-existing loan, on paper, it does not adversely affect the risk profile of the bank that issues the new loan.
A typical credit policy for a financial institution notes the heightened risk when existing auto loan balances are rolled into new auto loans because borrowers sought to buy a new car before the previous one was completely paid off.
Deviation from such policy leads to consumers’ inability to pay, which leads to repossessions, bankruptcies, and bad reputation for lenders and dealerships.
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