Economists sometimes use the term “Goldilocks moment” to describe an economy where everything’s just right—like the moment in the fairy tale when Goldilocks finds the perfect porridge.
The confluence of favorable circumstances that economists consider when defining a Goldilocks moment is not unlike the current moment in used vehicles. Consider:
We’re seeing the highest level of retail demand so far this year. And, it’s occurring in August. Usually, the spring selling season marks the high point of demand for a calendar year. It’s odd that we’re seeing sales rise now.
Cox Automotive analysts speculate that the surprising sales increase owes to factors like the higher-than-ever average age of vehicles on the road and related need on the part of owners to replace their current vehicles. They also note that, while interest rates for used vehicle loans remain high, they have stabilized, along with inflation. At the same time, retail prices have been declining—a reflection of the rapid wholesale depreciation we saw from late spring through July. In sum, consumers who need or want a used vehicle, and who may have recently considered a vehicle purchase out of reach, appear to be regarding the current moment as the time to make a move.
In the fairy tale, Goldilocks runs away when the bears return, ruining her moment of bliss. In used vehicles, there are several emerging factors that suggest the current mix of favorable conditions for dealers and consumers will also be short-lived.
The factors appear, as they often do, through wholesale market activity. Dealers have been buying vehicles as they sense the rising demand, look out at their average 44 days supply of inventory, and go to the auction. Conversion rates at Manheim auctions are currently higher than they’ve been in some time.
Given the still-limited supply of wholesale vehicles, the current buying activity is likely to spur an overall rise in wholesale values. In turn, we’re likely to see a subsequent rise in retail values, which might spoil consumers’ sense that it’s a good time to buy a used vehicle.
More broadly, we have the prospect of another federal interest rate increase, the resumption of student loan repayments that were paused for the pandemic, the possibility of a budget impasse in Congress and the seeming stall in labor negotiations with auto workers. All of these seem poised to darken the current consumer mood and their interest in purchasing a used vehicle.
With this outlook, I’ve been urging dealers to be cautious as they step up to meet current retail demand by acquiring more vehicles. If you stock inventory too far above your rolling 30-day total of retail sales, you’ll be at risk of holding the bag when the Goldilocks moment passes. Similarly, the current price volatility requires careful attention to how right you’re buying and pricing your vehicles for retail sale.
My goal here isn’t to throw shade on the current moment. Rather, my intent is to outline where things appear to be headed, and help dealers at least be aware of what may well lie around the corner.
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