In March, I told someone to wait before buying a used car. COVID-19 was starting to cause lockdowns and promised to cause layoffs. In April, I gave the same advice. I gave the advice in May and in June. Now into July both wholesale and retail used car prices have spiked.
To examine why I was wrong, it’s important to examine the underpinnings of my advice. I assumed that COVID and COVID policies would cause a spike in unemployment and result in fewer people able to purchase vehicles of all kinds (new and used). I anticipated that defaults and repositions would spike in the summer and that supply would boom. Each month would bring worse COVID news, and each month would bring fewer people to car lots. With people working from home and potentially selling vehicles to stay afloat, increased repossessions, and depressed demand car prices had to sink with each subsequent month of the pandemic. It was calloused thinking, but I couldn’t think of an alternative model for car prices.
There was an alternative model. In this model prices of used cars rose as a result of COVID. There were a few elements that I was (sadly) correct about in March, unemployment rose and each month brought worse COVID news. My projection was proving to be prescient in April as used car prices plummeted. In May, it was clear that my projections were proving false in the medium-term.
My projection did not account for many of the reasons that used car prices jumped this summer. Those reasons include:
- Public transit became unattractive during the pandemic for those who needed to commute throughout the pandemic. (Positive demand shock)
- The CARES Act provided the unemployed with an $600 dollars per week enabling many to buy affordable used cars even while unemployed. (positive demand shock)
- Trade-ins slowed because dealers incentivized lease renewals. (negative supply shock)
- Car manufacturers closed factories leading dealers to prioritize used-car sales. (negative supply shock on new and used cars)
- Lenders initially offered relief on auto loans at the start of the pandemic (although this slowed in May-July) which prevented the spike of repossessions I anticipated. (negative supply shock)
This series of unanticipated shocks, along with others of which I am still not aware, led to an increase in the price of used cars. To prevent missing the mark to the same extent in the future, what will I incorporate?
The government did not allow citizens to fail economically in the way that I anticipated that it would. I should know, especially in an election year, that the government will keep people (and businesses) afloat when it is politically beneficial. I also should have accounted for those who bought cars to escape public transit, in retrospect that was a pretty obvious component of a pandemic that requires social distancing.
What do I project for the next six months? Will I improve my projection based on the learnings above?
I anticipate that the price of affordable used cars (older than 2010ish sedan) will remain stable through the year. These prices will remain high because people will continue to avoid public transit and there will be some bolster to unemployment benefits though November at minimum. More expensive used cars will suffer. Dealers are offering irresponsible financing offers that include an 84-month option, as an example. Buyers will see lower monthly prices and agree to loans that will last longer than the vehicle they purchase. When its time for a new vehicle they will be trapped with negative equity and require a similarly predatory loan. Rinse and repeat.
Long-term I have concerns about the new and used auto market. People who bought vehicles to escape public transit will return to public transit and sell the vehicles. The increased unemployment will end. Millions of car loans are in deferral programs already, those period will end (and some are). I doubt the repossessions will come this year, but I think they will come. The rise in Americans trading in vehicles with negative equity is not an indicator of a strong market. The current COVID-related financing offers will not improve the scenario three years from now. Hopefully, I will write another post of why I was wrong in a few years.
Polly Wanna Math 