COVID May Have Created The Best Time Ever To Buy A Car

One of the under reported stories about COVID has been its potential impact on the auto industry.  This year could be the best time in a generation to buy a car.  

There has been the full stop of auto auctions.  Normally this is where rental companies, corporations with car fleets, and others dispose of their vehicles.  Car dealers around the country attend large scale auctions where they buy inventory of these used cars to sell on their lots.  There hasn't been an auction since mid-march when COVID set in, which has cars scheduled to rotate off of fleets piling up.  Large auction houses like Atlanta-based Cox automotive are trying to pivot to a digital auction program, but Cox furloughed 12,500 workers this week , which could meant they know this will be a long process.  Manheim, an auction subsidiary of Cox posted this chart showing how sales prices have dropped from April last year across all market categories:

Click to Enlarge

A VP of Cox recently wrote an open letter to dealers where he predicted that "The market isn’t likely to improve significantly in 30, 60 or even 90 days."  He goes on to lay out three facts of what will put additional pressure on dealers:

• In six months, every car on the lot will be a model year older.  One-to-three year old used vehicles are in a weak spot because the factories will likely provide help for the dealer to clear out their new cars, but the dealer is on their own for 2019 and earlier cars. 
• In six months, there will be huge levels of wholesale supply on the market as all the rental fleets and dealer-owned used vehicles come to auctions. 
• Unemployment and a sluggish economy will likely depress sales even further. 

When they are moving again,  there will be extreme pressure to move cars quickly to make room for the ones backed up in corporate fleets.  A few weeks ago, we saw oil futures go negative -- people were paying to take oil off their hands.  That situation has since corrected, but it was due to oil coming out of wells with no place to put it.  The auto industry is facing the same dynamic of used cars flowing into a market with few takers.  I'm not saying someone is going to pay you to take their car, but I would expect dealers to be considering deals they would never offer before to get cars off the lot. 

The pressure will likely increase into the summer as the 2021 models start arriving on lots and all the existing cars become another year older.  Auto makers will likely pull out all the stops to create incentive for customers to buy the 2020 models to make room for the new ones. Also, the cars coming off rental fleets will have spent 3-4 months parked on the lots going practically unused so they will be some of the lowest mileage cars to see auction once they make it there. 

While all these factors can make an attractive market for a car buyer,  it is a list of miseries for car dealers.  Most in this business probably came into 2020 expecting a great year with wages going up, record employment, and a high confidence in the economy.  In addition to the shock of the lock down, Many dealers probably took on more cars expecting great returns and now the interest on the debt they took to buy those cars is now draining their cash reserves. Many won't make it.  Often, car dealers are long term members of their communities,  giving to charity and sponsoring youth sports leagues.  If you do choose to take advantage of the market situation,  I encourage you to be kind about it.  

DISCLOSURE:  I've never worked in the auto business, but picked up some of the market dynamics from friends who do.  If you're close to the industry and see a flaw in my reasoning,  you're probably right and should post in the comments.