Vehicles stuck in parking lots, New & used car prices, Is Carvana back?
Guess which stock is up 570%+ since Dec?
📊 New & used cars: marketplace update
🛻 Have we forgotten about Carvana?
⚖️ Shoppers’ Corner: should I buy new or used?
🎙️ CDG Podcast transcript with Chad Cunningham: Art of appraising cars, How much money auto wholesalers make, Cars to avoid and more.
Reading time: ~4 min
📊 Auto marketplace update
New car sales in May increased by 22.8% from a year ago, and the seasonally adjusted annualized rate (in layman's terms, how many units would sell at the end of the year if the sales pace continues at this rate) came at 15.13 million units.
New car prices are still creeping up, with the average transaction price ending up at $48,528, a 3% increase over May '22. The good news is that the average price paid for a new vehicle is below MSRP for the fifth consecutive month. Certain dealers are more open to discounting due to growing supply levels and manufacturers are beefing up incentives as inventories increased by 37% compared to May of the previous year.
The days of supply stayed stable at around 52, with 73% more units than last year.
There’s still a big disparity between manufacturers on days of supply. Here’s the chart I like from Cox which clearly shows that you have a much higher chance of finding a Jeep than a Toyota.
Best-selling models in May:
Ford F-Series (up 42.7% from May 2022)
Chevrolet Silverado (up 5.2%)
Ram Pickups (up 11.9%)
Toyota RAV4 (up 3.8%)
Honda CR-V (up 95.4%)
Tesla Model Y (up 76.8%)
Toyota Camry (up 17.8%)
GMC Sierra (up 17.7%)
Jeep Grand Cherokee (up 25.0%)
Nissan Rogue (up 114.7%)
But not everything is smooth. As manufacturers are churning out units, they have to deliver them to dealerships. About 75% of new cars are delivered by rail.
During the pandemic, the need for transport plunged, but now manufacturers ended up producing more units than railroads can transport, exceeding railroads' forecasts. Why? Apparently, we have a shortage (more specifically, misallocation) of railroad cars.
Special-purpose railroad cars that are used to transport vehicles are shared between railroads and their usage has to be optimized to meet the demand of auto-makers. This happens because railroads are connected to each other in a network, impacting each respective railroad car’s operations.
The problem is not new. The same shortage happened back in 2012 when the post-recession surge in auto production caught railroads off-guard. The rail-car shortage is more prominent for assembly plants in the Midwest, and that’s why we see reports of thousands of GM trucks trapped in vacant lots.
Manheim’s used vehicle value index declined again in the first half of June, continuing the trend, and the declines are slowly making their way into retail prices.
Many used car dealerships, including large retailers, such as CarMax and Carvana are struggling to sell cars that were purchased at higher prices earlier this year. The used day’s supply (the number of days, expressed in units, to deplete the current inventory at the current rate of sales) is around 46 according to Black Book, which is 8% below last year.
The volume of listings is similar to what it was in 2019 according to the chart below from Black Book:
At the same time, the supply of affordable cars is still tight. Used cars under $20K are still a hot commodity. Here’s why: compared to the pre-pandemic market, lease volume is about 50% of what it used to be, trade-in volume is 13% down, and off-rental vehicles are older and pricier.
The average used vehicle listing price is down 3% from the last year at $27,171.
Another contributor to softening used car prices is the competition from new cars. Some manufacturers are offering special financing for new cars, with low rates that are unattainable for used cars. The average auto loan interest rates across all credit profiles in June are 6.07% for new cars and 10.26% for used cars.
Interest rates and the economy are the top two concerns for dealerships, as indicated by the survey conducted by CDK Global. Limited inventory is no longer the top concern, but credit availability for consumers was mentioned as a factor holding back business by 30% of surveyed dealerships.
The pullback of lenders from auto financing keeps happening. Here are just a few examples. I tweeted about Fifth Third bank shutting down auto lending in select regions.
Fifth Third Bank is shutting off auto lending in select regions.
Unclear how widespread this. This specific image *only* addresses dealer partners in Idaho.
Another big blow to dealers in an already brutal lending environment 🥵
— CarDealershipGuy (@GuyDealership)
Jun 29, 2023
Citizens Bank also announced that it is stopping new auto lending in partnership with dealers starting July 1.
Capital One decided to exit the floorplanning (aka inventory financing) business for dealerships in March
U.S. Bank is also downsizing its auto loan book.
Automotive Credit Corp, a subprime lender, has begun cutting off select car dealers due to "ongoing concerns regarding adverse market conditions"
It’s not surprising that banks are shrinking their auto loan portfolios because auto loans are either, i) not their top profit center or, especially when the cost of funding and deposit costs are rising or, ii) they’re predicting tougher market conditions.
🛻 Have we forgotten about Carvana?
I haven’t talked about Carvana for a while. In the meantime, the stock seemed to follow the playbook of meme stocks like Bed Bath Body & Beyond, AMC, and Gamestop. Shares went up over 570% from their lows in December of the last year. What’s next?
Carvana 1yr stock chart from Google
Carvana’s situation is not any better today than 6 months ago. It is forecasting the Q2 loss to be around $200 million. A major chunk of CVNA’s revenue goes to pay back the money they’re borrowing to get inventory.
Between September and November, it will have an interest payment due of over $234 million. The $488M of cash flow is not enough to fund the continuing losses, so there’s a chance that Carvana will miss the interest payment, at which point creditors could potentially take some control of the company (❗Note: I can’t predict the future and these are all extrapolations).
With used car prices falling, interest rates at historic highs, and banks tightening their credit policies, the current stock valuation feels unjustified (❗Another Note: This is not financial advice, just my opinions). If the “meme stock playbook” continues to manifest, the likely next move for Carvana to survive would be to have a large equity offering to cover the losses. Will it happen? Who knows. Time will tell.
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⚖️ Shoppers’ Corner: should I buy new or used?
Should I buy a new or a used car? When you find 2-4-year-old units priced close to new ones, it makes sense to consider buying new and enjoying the peace of mind of having the factory warranty. It is especially true for popular cars that don’t depreciate much.
New cars become even more attractive than used ones when a manufacturer offers a financial incentive in the form of a low-interest rate. Note that the average used car loan interest rate is above 11%, so even a special rate of 6% is not a bad deal.
Even if there are no specials, a lower financing rate for a new car could make the monthly payment very similar to that for a used car, even though the selling price of a new car is higher.
Here’s an example (assume zero down, only pay taxes and fees out of pocket):
Used 2021 Toyota Tacoma, 51K miles, listed at $36,000. Financed at 11.0%, monthly payment: $930.
New 2023 Toyota Tacoma, $39,000 financed at the special rate of 3.99%, monthly payment: $880.
You can drive a brand new car over a 2-year-old one for $50/month less. Sign me up!
Some models that may fall into this category include Toyota Corolla, Toyota Highlander, Toyota RAV4, Toyota 4Runner, Toyota Tacoma, Toyota Tundra, Jeep Wrangler, Honda Civic, Honda Pilot, Honda Accord, Subaru BRZ, Subaru Crosstrek, Ford Mustang, Chevrolet Camaro, and others.
Check manufacturers’ websites for financing specials in your area and estimate your payment when deciding between new and used.
🎙️ Transcript from CDG Podcast featuring Chad Cunningham
Art of appraising cars, How much money auto wholesalers make, Cars to avoid, and more…
Topics we discussed:
01:49 - Chad's background
05:48 - How wholesaling works
13:31 - Achieving consistent profitability
17:17 - The "vibe" factor at auctions
23:47 - Becoming a top-performing wholesaler
29:14 - How Chad appraises cars
35:30 - Which cars to stay away from
40:38 - Navigating trade-in offers & used car prices
45:45 - Wholesale Car Club
56:45 - CDG face reveal?
59:52 - Wrapping up
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