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Today's topics:
🤷 Where are the discounts?
📈 Financing headwinds
🔌 Electric buzz
🎱 What to expect in 2023?
⌛ What to do if you need a car now?
Reading time: ⏱ about 3 min 26 sec
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🤷 Where are the discounts?
Car buyer demand was weaker than expected in December. High payments, limited availability, and weird weather cooled down shoppers’ enthusiasm.
Wholesale used car prices fell 14.9% year over year in December per Manheim’s Used Car Index.
Retail prices always lag behind wholesale and have been predictably following the decline, but with some friction. Cox reports the average listing price of a used vehicle was $27,156 through November, only a 2% decline from a year earlier but the lowest since last spring.
Used cars with LEAST availability right now:
Lexus
Subaru
Toyota
MazdaExpect prices of these cars to drop much more SLOWLY than the rest of the used car market.
— CarDealershipGuy (@GuyDealership)
Jan 15, 2023
Some dealers are having a serious case of loss aversion fear, trying to squeeze profits from cars acquired at the peak of the market. Brian Kramer, the general manager of Accu-Trade (subsidiary of Cars.com) recently wrote that 43% of listings on Cars.com are 45+ days old. He argues that dealers are too slow to react to market conditions, falling into the trap of following lagging indicators.
Cox Automotive
As prices keep falling, dealerships don’t want to retail aged inventory at a no-profit, while a fair amount of “no-sales” at auctions causes auction estimates to be higher than what a vehicle can bring when running through a lane. (A no-sale means that a buyer and a seller could not agree on a price).
Tesla and GM gained the most market share in 2022, while Honda and Nissan lost the most. Why? Honda could not react quickly enough to the chip shortage, while Nissan’s product has been lacking behind competition.
📈 Financing headwinds
Interest rates continue rising and so do monthly payments. The average payment in December climbed to $718, and the average rate is now 6.26% for the 60 month term.
J.D. Power
Edmunds reports that 15.7% of consumers who financed a new vehicle in Q4 of 2022 committed to a monthly payment of $1,000 or more — the highest percentage ever. To keep monthly payments reasonable, consumers are putting more money down, with the average down payment for new and used vehicles at record highs of $6,780 and $3,921, respectively.
Declining prices brought another issue: negative equity. The days of cars appreciating in value are gone: Edmunds reports that 17.4% of new vehicle sales with a trade-in had some negative equity in Q4 2022, compared to 14.9% in Q4 2021. The average amount owed on upside-down loans was $5,341.
Softening prices and negative equity means trouble for banks bringing the wave of missed payments and repossessions, so financial institutions tighten their credit policies. Cox reports that access to credit tightened in December on most channels except for certified pre-owned (CPO).
Lenders need to make money, and some are taking advantage of vulnerable customers. Credit Acceptance Corp is sued by New Nork, accused of knowingly writing thousands of loans to low-income individuals that could not have afforded repaying them. As I wrote in my previous newsletter, some lenders are playing with the debt-to-income ratio or are dropping the existing auto loan stipulation to squeeze customers into approvals.
Leasing penetration further declined to 16% in Q4 of 2022 – quite a drop from 29% in Q4 of 2019. There are not many manufacturer subsidized leases, interest rates are high, and residual values are conservative, hence unattractive monthly payments.
🔌 Electric buzz
Electric vehicles sales are gaining momentum, although slower than anticipated, and accounted for 7.8% of total sales in December. Deloitte surveyed shoppers and found that the US shoppers’ preference for internal combustion engines dropped to 62% from 68% a year earlier.
J.D. Power
EVs are still squarely in the luxury cars territory with the average new EV price being $65,041, according to Kelly Blue Book estimates.
Still, Kelly Blue Book estimates that the EVs volume exceeded 800,000 units for the first time, an increase of 65% from 2021.
Everyone is talking about Tesla prices going through a big correction. I tweeted about this even before Tesla decided to abruptly drop prices. It is not uncommon to see used Tesla listings dropping $12K - $20K since September, falling 2X faster than the market. Carmax reacted with a Tesla fire sale and the next day 57% of its entire online Tesla inventory was gone. One could say they simply adjusted to market prices — either way, it worked.
Tesla’s abrupt price reductions across the board will lead to its more market share gains in the long run. Kelly Blue Book just released EV sales numbers from Q4, and Tesla’s market share is still at 64.6%, almost 9X the nearest competitor, Ford.
There are speculations that Tesla prices drop is related to the government’s EV credits game as well as the upcoming new battery system that is cheaper to produce. There’re also reports on Twitter that Tesla is likely to increase its presence in rental fleets. In short, Tesla is now paying the same game as traditional manufacturers have been playing for years: sell more to fleets and lower prices.
Tesla's recent price decreases will hurt all-around in the SHORT RUN:
Investors, car owners, dealers. All screwed.
But in the LONG RUN:
It will greatly STIFLE competition and help Tesla gain MORE market share.
— CarDealershipGuy (@GuyDealership)
Jan 14, 2023
Some may see this as a sign of trouble, but in reality this is Tesla flexing its manufacturing capacity and profit margins. Not many competitors can easily pull off a move like this without disastrous consequences on profits.
Competition is bringing up the heat in the meantime. BMW’s CEO Oliver Zipse said that BMW “will be the benchmark in terms of range, charging speed and pricing. Don’t forget pricing.”
🎱 What to expect in 2023?
New and used car prices likely will be less volatile, but will keep declining. There’s still a lot of ground to cover to return to normal as used car values ran up 40% in the last year.
Expect a typical slight uptick in prices in Feb/March due to tax refunds, but it will be overridden soon enough.
Rental car companies helped prop up the wholesale used car market last year. In the absence of new car inventory, they were opportunistically buying whatever they could regardless of price. Now that there is some supply of many new models, rental companies are shifting to buying new, which will contribute to the softening of the used car market. Why?
Fleet sales are up accounting for 17% of total sales, which is up 10% from a year ago. According to Bobit sales data, there were slightly over 500K units sold into rental fleets through October 2022, compared to about 1.5 million units over the same period in 2019. As the rental fleet ages and prices go down, rental companies are eager to jump into the market to renew their depleted fleets.
There will come the time of reckoning when a wave of defaults and repossession will hit, especially if the recession will materialize. Repossessions will cause more pain for dealerships around compliance and chargebacks for finance products.
Lending will be tight as more and more lenders will have to face steep losses and explain to investors why their portfolios are not performing.
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⌛ What to do if you need a car now
I get a lot of questions about timing: should I buy now, should I wait, and what to do if I need a car now, but payments are high and availability is low.
My first advice to stick with cars under $25K. Here's why: their supply is scarce, they are holding their value that is not likely to drop quickly. Used cars that cost over $25K have lots of price risk. Supply is very abundant and prices will likely fall faster.
My second strategy to consider is to buy an out-of-fashion car. You will be able to negotiate better discounts, as there's less competition from other buyers. There are a few diamonds in the rough that are unfairly forgotten, simply because they are perceived as uncool. Here are a few examples:
Mazda6 sedan which has been discontinued in 2021. It is a comfortable, reliable sedan, built in Japan since 2014. They have a very nice interior design, not far from Audi, engaging driving experience, and are very fuel efficient.
Ford Taurus, also discontinued a few years back, traces its lineage to Volvo S80. It delivers a solid, European feel, it is safe and cheap to maintain (because it has been used by police), spacious, powerful, comfortable, and available with all-wheel-drive.
Subaru Legacy — pretty much the same car as the ever-popular Outback, but with a trunk. Same engine, capable 4WD system, nice suspension, interior, and gadgets, but for less money.
Want some luxury? Look at used Acura TLX — almost as good as Lexus ES but cheaper. Buick LaCrosse is another car that will deliver a very up-level feel without paying a premium.
What about something sportier? Try Cadillac ATS. GM benchmarked its handling from BMW 3-series E46 generation, which means it could be more fun to drive than modern-day BMWs.
Get one of these not-so-ugly ducklings and stay safe from huge car payments.
financially free 2023
no $1,000+ monthly payments
no leasing
no German cars over 60k miles
no markups
no 84-month financing— CarDealershipGuy (@GuyDealership)
Jan 10, 2023
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-CarDealershipGuy
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