Is now a good time to buy a car? Spoiler Alert: The answer is no!
The Car Market
One of the most popular questions from clients who have been waiting is, “is now a good time to buy a car?” Spoiler alert: the answer is no! If you are interested in the details read on.
Just about every other economic downturn, cars sat on dealer lots and could be had at incredible values because nobody was shopping. We’ve actually bought new cars during these times, driven them a couple years and sold them for what we bought them for or more after the economy rebounded.
I expected the same this time around when I saw articles like this one from several media outlets https://www.bloomberg.com/news/articles/2020-04-13/fear-of-an-impending-car-price-collapse-grips-the-auto-industry saying things like this “Used-vehicle auctions are for now virtually paralyzed, much like the rest of the economy.
The grave concern market watchers have is that vehicles already are starting to pile up at places where buyers and sellers make and take bids on cars and trucks -- and that this imbalance will last for months.”
Dale Pollak, an executive vice president of Cox Automotive, which owns North America’s largest auto-auction company, wrote in an open letter to auto dealers early on saying, “Cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.” Deal alert!
In response to this projection, automakers started offering lease extensions to existing customers in an attempt to avoid the crush of returns they feared unable to sell.
Manufacturers and dealers offered 0% interest rates for terms as long as 84 months on new cars. Some with no payments for 120 days while others offered to take the car back if there is a job loss within the first year of ownership.
These are pretty extraordinary measures not seen since the financial collapse of 2008.
Now is a decent time for a “Public Service Announcement.” Sales price is the most critical factor in an auto purchase. Interest rates have been negligible, particularly on new car purchases for years. I have clients who purchased vehicles in 2016 at 0% interest for 60 months. If you need to finance a vehicle for 84 months in order to make the payment affordable, it’s too expensive for your situation. Extending financing terms is how automakers have been able to substantially raise prices while median income has remained basically flat.
There were several more articles written about the impending doom in the auto industry. However, rather than there being a glut of cars sitting on lots, within a matter of weeks I started seeing news stories where dealers were running out of vehicles and buying off of other dealer’s lots. Particularly in full sized trucks. With everyone supposed to be staying home, it made no sense.
There are always clients who are looking to replace cars, so I am always on the lookout for deals. But here’s the thing, as we moved through April and into May, I noticed prices of new and used cars actually going up. A year old truck (Ram 2500 Power Wagon) that could be had in April for $40,000 was now $46,000. Subarus that were being discounted from MSRP were now nowhere to be found.
The big picture didn’t make sense until I came across these videos (and several others – these guys are pretty entertaining) from the Auto Advocate on YouTube.
More buyers than vehicles are coming into the market at this point. Auction prices are above normal as a result of the low supply.
It’s a nationwide phenomenon, but stronger on east coast due to population.
Dealers are bidding on cars across the country right now and paying as much as $1,000 in transportation costs to keep inventory on their lots.
The really bizarre news is in the new car data. New car sales volume is down across the board something between 13% (Kia) and 52% (Fiat). Popular brands like Mini and Dodge are down 40% and 42% respectively. They aren’t selling as many cars.
However, inventory on dealer lots as measured by Market Days Supply, normally a critical measure of dealership health, is at all-time lows due to production shut downs. Automotive News National data on some popular vehicles that dealers would typically want to have 90-120 days of inventory on shows:
Honda Pilot (the most popular car purchased by clients of the firm) 47 days
BMW 3 series 49 days
Hyundai Palisade 29 days
Kia Telluride 16 days
In some places Toyota Tacoma's actually have negative Market Days Supply meaning trucks that haven’t even been delivered are already sold.
In summary, while July is typically a pretty good time to be in the market for a new car due to model year changeover, that is not the case this year due to supply constraints.
With most people at home, one would think demand for used cars would be minimal so prices soft. In actuality with people retreating from public transportation and a lack of new cars for those shopping, used car prices are actually higher.
If you’re looking to sell a car, do so within the next 6 weeks. Used car wholesale prices have never been this high.
If you’re looking to buy, absent an immediate major repair expense, it’s best to wait on replacing that car. If demand drops after this initial crush of buyers and supply ultimately does rise with plants being back on line, the opportunity for a deal may present itself. This is what I do in my spare time, so I will be keeping an eye on things.