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Sale Prices of Used Vehicles Continues Spiking

1970s-Style Stagflation
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EDITOR NOTE: In 2008, when the global financial system nearly derailed, consumers went on a buyers’ strike. Sales crashed, and with it, profits across multiple sectors. One industry that wasn’t spared was the automotive industry. Today, in what may be the tail end of the longest US stock bull market in history, we’re facing a different yet similarly debilitating economic scenario: inflation. With consumer goods rising slowly but steadily, housing and vehicle prices have already surged significantly. New and used car prices are rising significantly as a result of tight supply. Yet the inflationary surge seems to have done very little to diminish the strong demand which, if you think about it, isn’t entirely inflexible. The author below speculates that this reflects a change in consumers’ inflationary mindset. What exactly does that mean? Are Americans normalizing inflation in the early portion of its surge? Might Presidents Trump and Biden’s stimulus play a role in the decision to make these purchases at inflated prices? At what point might buyers say enough is enough and limit their spending?

This would normally have triggered a Buyers’ Strike, but the Inflationary Mindset has changed.

Why do people – dealers and consumers – still pay those crazy spiking pries of used vehicles? For most people, replacing a vehicle can be delayed unless some major calamity befell the vehicle. This was proven to a shocking extent during the financial crisis when consumers went on a buyers’ strike, and sales of new and used vehicles collapsed and stayed low for a long time. So why is demand now holding up at those crazy spiking prices? Because the entire inflationary mindset has changed.

My gut says that these crazy price spikes cannot continue for long, and some of this will eventually unwind, and thereby they sort-of fit the Fed’s definition of “temporary,” but they won’t go back to where they had been. Some portion of these price increases will become the permanent foundation for future price increases.

Prices of used vehicles sold at auctions around the US in May spiked by 4.6% from April, by 26% year-to-date, and by 45% from April 2019, according to the Used Vehicle Value Index released today by Manheim, the largest auto auction operator in the US and a unit of Cox Automotive. Retail prices lag wholesale prices by about six-weeks:

Prices of Used Vehicles

Dealers that go to the auctions to buy inventory to sell on their lots are paying those prices. They’re bidding against each other to get some of this inventory – confident that they can pass those higher prices plus big-fat profits on to consumers.

These dealers are now also bidding against rental car companies that are normally the biggest sellers at these auctions, but that are now running low on vehicles in their rental fleets amid a burst of domestic travel demand, and now they have turned into buyers at auctions.

Used vehicle fleets normally buy over 2 million new vehicles per year and cycle them through their fleets and dispose of them later by selling them at auctions, on their own retail lots, or directly to large used vehicle dealers. But that whole flow was interrupted last year when travel – and demand for rental vehicles – collapsed. Rental companies “defleeted” by cutting their orders for new vehicles and by selling part of their fleets at auction.

Now they’re short on vehicles, just when the semiconductor shortage has hit automakers that now cannot build enough vehicles. So automakers are prioritizing high-profit decked-out trucks and SUVs to be retailed by dealers, where everyone is making a ton of money. And rental car companies have complained – such as Avis in its 10-Q filing with the SEC – that they’re having trouble getting their orders filled.

Pickup trucks continue to be the hottest WTF price-spikers, with prices up 70% compared to May 2020. The low man on the totem pole were the despised compact cars, and even they experienced a year-over-year price spike of 39.7%. In terms of the “Base Effect” for year-over-year comparisons: it’s minimal because auction prices in May 2020 were already on the upward trajectory, having bounced off the April low, and were just a tad below May 2019.

Prices of Used Vehicles

A buyers’ strike of the type that occurred during the Financial Crisis would normally sort this out quickly: As buyers revolt against these price increases, demand would collapse, and supply would be able to catch up, inventories would build, dealers would curtail their auction purchases, and prices would drop until demand reappears.

But that buyers’ strike has not yet kicked in. Instead, the entire inflationary mindset has changed, with consumers jostling for position to pay those crazy prices, and with dealers being confident that consumers will continue to pay them.

Total used vehicle sales – retail and wholesale – continued in May at the same strong pace as in April, and were up 3% compared to May last year, at a seasonally adjusted annual rate of 41.0 million vehicles, according to Cox Automotive estimates.

Used vehicle retail sales alone also matched April at a seasonally adjusted annual rate of 22.4 million vehicles, up from 21.1 million in May last year.

Supply remains tight for this pace of sales. Used vehicle retail inventory at the end of May was down to 38 days, according to Manheim, when 44 days would be normal; and wholesale supply at the end of May was down to 19 days, when 23 days is normal.

Original post from Wolf Street

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