SAN DIEGO, California (November 2010) - Every autumn, hundreds of used-car dealers and industry experts gather to get the latest news and recommendations for promoting those secondhand automobiles. Hosted by Auto Remarketing magazine and its parent, the Cherokee Automotive Group, the National Remarketing Conference (NRC) drew some 500 attendees to the Manchester Grand Hyatt hotel for two days of presentations.
Tom Kontos, executive vice-president of ADESA Analytical Services, foresees "somewhat slow growth, but at least some growth." If we believe it, he said, it will probably start happening. ADESA is a major used-car auction group.
Kontos explained that the recession began after December 2007, with a bit of a blip when the Bush Administration issued $600 checks to taxpayers. Late 2008 was the inflection point, accompanied by volatile gasoline prices and a credit "freeze." Officially, the recession ended in June 2009 - a statement that, while accurate, invariably produces mirth among those who continue to suffer from its effects.
"Unemployment tends to be a lagging indicator," Kontos told the NRC audience - essentially "flat" at 9.6 percent in early November. Consumer credit outstanding, as a percentage of personal income, has been declining, reaching 19.22 percent by early November. "We'll take this as a righting of the consumer's ship," Kontos declared, predicting that a "double-dip" recession will not happen.
Inability to find financing contributes to increase in the personal savings rate. However, that difficulty in obtaining credit is as much of a reason for saving as is any newfound prudence or restraint on the part of consumers.
Used-vehicle prices are starting to bump against new vehicle prices, Kontos reported. This will tend to shift a portion of used-vehicle demand toward new models. When you get above 60 percent of new-car price, Kontos suggests, people gravitate toward new. That figure reached 58.5 percent in August 2010.
Wholesale vehicle prices hit bottom in November 2008, but have "firmed" since then. They're likely to continue an upward trajectory, but more moderately. Full-size cars have been dropping in wholesale values, while minivans were up 9.6 percent and full-size vans rose by 13.9 percent.
The price gap between used compact cars and full-size trucks has been restored, Kontos said. Full-size SUVs average about $7,500 more than a compact car, and full-size pickups top that compact by: above $4,700. "SUVs and pickups have really come back," Kontos added
New-vehicle incentives averaged $2,559 in fall of 2010, Kontos said. Leasing volume dropped 25.5 percent in 2009, and a bit more than that in 2009, before rising by 3.2 percent in the earlier portion of 2010. Kontos believes there "won't be more cases of people buying more cars than they really need."
Tom Webb, chief economist for Manheim (another used-vehicle auction group) takes a slightly different view of America's financial near-future. What kind of economic recovery will we see? Not V- or U- or L-shaped, in Webb's view. Not "double-dip" either. Instead, Webb foresees it as an upward slanted "W."
We will go into recession before we reach the previous peak, he declared. Why is that so? In contrast to some experts, Webb believes the "financial crisis leaves lasting scars."
A second dip in housing is likely, Webb said, but not nearly as bad as before: perhaps 5 percent, with an "overhang of foreclosures" and "pressure on pricing." Lasting weakness in the labor market is a major factor. Initial jobless claims were very good in October, Webb said, after peaking in 2009. But there's "too big of a hill to climb."
From "peak to trough," the U.S. lost 6.1 percent of its labor force (8.1 million jobs). Today, about the same number of people are employed as there were in December 1999; despite population growth in the interim. The aftermath of this recession in terms of jobs looks vastly worse than prior downturns, Webb said. Almost 7 million people have been unemployed 6 months or more. When that happens, "it's most likely your job's not going to come back." Only in the country's Wheat Belt is the unemployment rate acceptable.
America also has seen an unprecedented six consecutive quarters of declines in household net worth: down by $12.3 trillion from its peak. Webb believes this shows "how big a paper boom we had in housing."
There's been a "tremendous reduction in mortgage debt outstanding," Webb said; but that's not quite as good news as it appears. Most of those debtors simply "walked away" from their financial obligations. Credit card debt also has fallen; some due to more prudent financial behavior, but some not.
Some say we are "entering a new normal," Webb advised. But "there is nothing new about it."
Used-vehicle sales should reach their previous peak long before new-vehicle sales do, Webb predicted. The "typical used-vehicle buyer is representative of mainstream America," Webb said. The typical new-vehicle buyer is not.
Repos are down by at least 7.5 percent this year. "Consumers have done a good job of paying their auto loans," Webb advised. Troubled debtors might walk away from their home loans, but they'll probably continue to pay on the car. "Both markets are totally driven by monthly payment."
New lease originations reached 1.1 million in 2009, and have seen a "substantial increase this year," Webb said: up 40 percent, to 1.6 million. The ratio of new-vehicle sales to number of households has seen a "decade-long decline." As a side note, Webb observed that average mileage for compact cars sold has risen from 51,000 in 2006 to 65,000 in October 2010.
In a session subtitled Insights into Market Share, Loyalty and Loan-to-Value, James Maguire and John Sidman delivered results from Experian's latest survey data.
Ford is the most prevalent make on U.S. roads, said Maguire (of Auto Market Trends), followed by Chevrolet, then Toyota. Trucks constitute 50.1 percent of total vehicles. The average age of cars and light trucks is now 10.3 years (up from an even 10 years in 2009)
.Just over four-fifths of vehicles are 15 years old or less, which means 19 percent are older than oldies: more than 15. Full-size pickups constitute almost 15 percent of the total. Midsize standard cars make up 13 percent. As for manufacturers, General Motors leads with 28.9 percent, followed by Ford at 20.2 percent. After rising quite steadily since the mid-1990s, the import-brand share dropped a bit. Around 2007, imports exceeded domestics for first time. Imports have been gaining sales in the used-vehicle market, while domestics have been losing.
Where are the most pickup trucks found? In the plains state. In Wyoming, one-third of vehicles are pickups. In California, it's 11 percent; in Texas, 22 percent. Washington D.C. has the lowest rate of pickup ownership at 2.3 percent.
Looking at changes in second-quarter registrations between 2009 and 2010, minivans showed the biggest drop, followed by low-end and midrange SUVs. Crossovers are apparently as popular as they seem, with registrations up appreciably lately.
Average ownership length in 2010 is 67.6 months for new vehicles, and 41.7 months for used models. Those figures contrast to 46 months for new vehicles in 2004, and 36.7 months for used. How long are specific makes owned? Buick and Volvo head the list, whether bought new or used. Mini owners keep their cars for the shortest period of time.
As for used-vehicle repurchase frequency, Toyota and Honda owners show the longest time between purchases; Chevrolet, the shortest. Dodge owners are the most likely to switch from buying new to going used; Honda owners are the least likely to make that move.
In mid-2010, used vehicles accounted for 61 percent of all financing, said John Sidman, national director for business development at Experian. The average credit score for new-vehicle buyers is 769 - a substantial difference from used-car buyers, who average 684. More than four-fifths of new-vehicle buyers fall into one of the Prime credit categories, whereas only 19 percent are considered at Subprime level.
Banks provide 37.4 percent of used-vehicle financing. Credit unions issue 26.8 percent of used-vehicle loans. Buy Here-Pay Here (BHPH) dealers (which generally handle lower-priced models) make up 13 percent of financing, followed by captive finance companies (tied to a particular manufacturer) at 12.1 percent. Finance companies round out the list, at 10.6 percent.
As expected, the average credit scores of used-vehicle buyers is lowest at finance companies (590) and BHPH dealers (614). Average interest rates are highest at finance companies (16.1 percent) and BHPH dealers (15.2 percent). Banks average just under 8 percent, while credit unions and captive finance companies hover around 7 percent.
Looking at characteristics of used-vehicle loans, the average amount financed by a bank is $17,277, while captive finance companies go higher, averaging close to $20,000. Credit-union loans average $15,668. BHPH dealers are the lowest, at $12,769. Average monthly payments run from $308 at credit unions to $390 at captive finance companies. Loan terms average only 46 months at BHPH dealers, but between 56 an 60 months for all other loan sources.
About 87 percent of used vehicles are valued under $20,000, and 72 percent are worth less than $15,000. Less than 1 percent are valued above $35,000
Working with various lenders, dealers are "very creative on getting deals done," Sidman said. "As LTV [loan-to-value ratio) goes up, the average credit score of that consumer" goes down - and the interest rate charged rises. "They have to make the loan profitable," Sidman explained
Consumers might not realize how much the used car business has changed, but dealers certainly do. Most of them, at any rate - though some inevitably try to stick to the old ways as long as possible.
Mincing no words, Doug Hadden, corporate sales and optimization manager at DealerTrack, told the audience that the “used-car operation used to be the place where you could hide all your sins.” Today, the old “3 G method [Gamble, Guess, Gut] of managing inventory is gone” In Hadden's view, the era of the “used car dog,” exemplifying the practices and values of the past, is gone too.
With online buying of used cars becoming almost the norm, as opposed to attending physical auctions to acquire inventory, some wonder if the whole procedure might eventually be running on "autopilot." Hadden doesn't think the wholesale buying/selling process will be truly automated. “There’s always going to be that human factor,” he said.
Control is another issue for dealers, and Len Crichter of eCarlist suggested that “we’re seeing a big shift.” Whether it's taking photos of cars for sale, or dealing with many other steps in the sales process, Crichter believes it's best to do it yourself rather than hiring outsiders for everything. “If you’re going to own a dealership today," he warned, "you’ve got to own the process.”
Dealers also have to accept the fact the well-informed customers are the rule nowadays, not the exception. “Your customer is more educated than the dealer, in most cases,” Crichter said. After all, he or she has been researching a single model, or, at most, a small group of models. Those shoppers have “looked on Auto Trader, on cars.com, on eBay,” and more. “You’d better be able to understand where they’re coming from.”
Crichter also wonders if some dealerships are overstaffed. “I don’t think you need as many salespeople,” he said. Today's customers “are phone people, these are e-mail people. Therefore, it makes sense to avoid “bloated staffs.”
Human contacts matter, though. “It’s a different type of sales process,” Crichter explained, yet “people buy the car from people they like.” The difference is that they do so after study the likely models online and gathering plenty of information.
Seemingly small matters make a big difference, too. Crichter cited a common question that isn't so often asked: Was the car smoked in. All the computers used by the dealership probably don't know. It's one of many factors that need to be determined by an actual person, before placing the car on sale. Or, before deciding to buy it in the first place.
Like DealerTrack's Hadden, Crichter doesn't think the buying/selling process will become overly automated anytime soon, to the point of just "push to order and we're done." If it does happen, that will likely take most of the fun out of the business. Besides, people “want to congregate, they want relationships.”
Randy Biel, the remarketing director for Chase, brought up the 3 Cs for looking at cars to buy and resell: “conditioning, color, and content.” The average example of a model might be selling for $10,000, he explained. "But if your 3 Cs are good, maybe 12 grand" is a possible selling price. And vice versa, of course.
“Constantly do your measuring,” Biel suggests, to keep on top of inventory. “Know your 3 Cs are right” and then price will be higher than average.
Consumers aren't pleased when their financial status goes awry and they wind up having vehicles repossessed. Neither are dealers who sold vehicles that are about to join the repo group.
There's “been a lot of tightening up in this business,” said Howard Segal of Wells Fargon Auto Finance. “There’s a lot of liability associated with this side of the business.” The collection rate is "extremely challenged, extremely stressed."
Neal Boardman of BB&T stated what's obvious to most observers: the level of “deficiency balances [is] quite high on the subprime side.” As the overall economy has faltered, “more people that fall into the nonprime/subprime market now.” And more of them are likely to wind up unable to make those car payments.
“Nobody really makes money buying subprime customers,” said Bill Walters of Westlake Financial. What you want are customers “who look subprime, but aren’t.” If a loan applicant has a moderately low credit score, but other indications suggest that he or she might actually be unlikely to default on the loan, the lender might be able to charge a tempting interest rate. But the risk will be less than it would when financing an applicant who's truly on shaky ground, and therefore a prime candidate for default and eventual repossession.
Tammy Darvish of Darcars, a dealership group in the Washington D.C. area, says she's selling fewer new cars these days, but has seen great increases in profitability. Used cars are another story, with financing remaining the biggest challenge. “Finance companies are looking for far more equity,” Darvash said. People are “more frugal now” and, in her view, “cash paranoid.”
Price isn't everything, though, and some customers are eager to buy regardless of cost. “Who cares how much it is if people love it,” Darvash told the NRC audience.
Jack Fitzgerald, of Fitzgerald Auto Mall, has been selling used cars since 1956 and has seen business grow in 2010. Yet, he concurs that “financing” is a big problem. “In hard times, there are a lot more 'need' buyers,” who truly need a vehicle for transportation - right now - even if their credit history is ragged.
Noting that “ repossessions skyrocketed in late '08," Chase's Randy Biel added that “one of the things really skyrocketed was voluntary” repossession. He saw “good, upstanding people driving a BMW 7 Series or Mercedes," who at some point had to say: "I just can’t make the payment anymore.... Please come get it.” In the past, dealers expected to have a hard time locating the defaulting person and the car. When ordinary folks are the ones going the repo route, at least those unpaid-for automobiles are easier to locate and grab.
Besides, Biel says there's been a “Huge drop in repo volume” lately, with “delinquencies way, way down; back to the good old days of 2006-07. In his view, financial institutions are “just making good lending decisions.”