For the past several months, there has been an ever-increasing problem in the used car market. In a nutshell, too many brands desperate to sell new units have been flooding the market with deals backed by poor lending standards. That bubble is about to burst.
Here are the four factors that have been overinflating the market:
Return of the Off-Lease
Well, we all knew it would happen, didn’t we? Those fleets of cars that were driven off the lot each weekend two years ago are returning like the swallows of Capistrano. Low mileage, moderately conditioned cars are coming back to the market ready to be sold. Hey, that’s okay, we knew they would come back so we planned for that, right? Well not exactly, those cars don’t have the high demand behind them that they did two years ago.
Extended Credit Terms vs Rising Rates
So, chances are you have noticed that the Federal Reserve is adding some new rates to the market. This isn’t a completely bad thing because it slows down inflation, but there is a bad side of it. Over the past few years, dealerships have been tapping extended periods to the point of record lengths (some as long as 10 years). That points to cars in the market that are not just under their value, but could be in a position whereby they have negative value. Remember the housing market burst?
Speaking of the housing market bust, sub-prime has been a major component of auto sales. Given record low interest rates, the availability of money and the tolerance for risk being higher, dealerships have been more focused on taking risks even in the used car market. The market is showing a weighted average FICO <550 at 32% vs 5% in 2010 according to Morgan Stanley, meaning that buyers with less financial stability have had access to more cars, something that is good but also risky at the same time.
Record High New Inventory
Like most things in life, one thing can be directly influenced by something unexpected. In 2010, would you have imagined that used cars could be more expensive than new? Yet, in July 2017, that is a very tangible reality. Incentives from OEMs have made car prices competitive not just with other brands, but with older versions of their own cars. Together, this has led to a strange universe where a used car buyer can purchase a new version of the used car for less.
Epic Change from Cars to CUV/SUVs
Perhaps you have noticed I was referring to cars, not autos. That is because car sales, particularly the bellwether of the market – mid-size four doors – have been beaten down for the first time in decades. In 2016, the new auto market buyer had a Moses moment. Literally, the buyer for mid-size, four door cars left. That buyer since then has purchased a CUV/SUV or a Compact – two extremely different types. This epic change in the market is influencing the desire for the same thing in used autos. Because the total number of used autos hasn’t grabbed the return of off-lease CUV/SUV, that buyer is either doing nothing or purchasing new. Yes, that is what we could all define as a major change.
There it is, bubble bursted. So, what can you do to deal with this change? How do you avoid the bubble bursting your dealership? Well, there are a couple of really strong strategies that will help you move inventory, lessen the impact of the burst as well as strengthen your bottom line all at the same time. For that information, you should contact Alabama Media Group Autos today.