There are two questions on the minds of many dealers and industry observers as retail sales of used vehicles continue an impressive run during the nation’s recovery from the COVID-19 pandemic.
The questions are: How is it possible, given the pandemic’s economic disruption that caused 45 million lost jobs across the country, that consumers continue to buy used vehicles? This week, Cox Automotive data shows the retail sales are up 26 percent from their pre-COVID levels, a rebound that we’re all happy to see.
The second question is how long can and will this impressive retail run, which few expected to be so strong, last?
I’ll try to answer both questions in the balance of this post.
To be sure, you could answer the first question with another question—Who cares how or why it’s possible that consumers are buying used vehicles? The fact is, they’re buying and that’s all that matters.
But this answer isn’t satisfying for those who, like me, need and want a more evidence-based explanation for why the retail used vehicle market appears so resilient. In fact, this question is a primary topic in the weekly calls and conversations among the top economists, data scientists and retail-focused people like me at Cox Automotive. I dare say it’s a group that boasts a solid blend of brainpower, credentials and experience. We’ve gathered every week since the pandemic started to assess and think about wholesale and retail market conditions for the purpose of helping our client dealers and partners plot a way forward.
This week, we landed on what could be dubbed the four “Cs” that are driving the strength of the current used vehicle market.
The first “C” is credit. The credit markets are working. Buyers who qualify can get great credit from the lending community to purchase a vehicle. To be sure, the loan-to-value ratios have tightened, but finance companies and lenders are still offering money to those who need and want it.
The second “C” is cash. I’ve heard more than one dealer relay that even though loan-to-value ratios have tightened, buyers appear to have sufficient cash to satisfy lender requirements. For example, if a consumer wants to purchase a $23,000 vehicle, and a lender will only finance $18,000, buyers appear to have the means to bring the additional $5,000 to the table to make a car deal. This situation seems to reflect the fact that, even prior to the pandemic and certainly during the pandemic, the savings rate of many households has been higher than it might normally have been.
In addition, the federal program that pays an additional $600 unemployment benefit bonus appears to be doing its job to supplement and support household budgets across the country.
The third “C” is confidence. This week, Cox Automotive’s industry insights team shared results from a survey of consumers that asked them to list their top 10 concerns about the current environment. Respondents listed the coronavirus, the upcoming presidential election, civil unrest, paying bills and crime as their top five concerns. I wasn’t the only member of the Cox Automotive group who thought consumers would be more concerned about their employment status, which ranked as the seventh concern.
The group took this data to mean that, despite the upheaval in the job market, consumers have a sufficient level of confidence about their household budgets to support a vehicle purchase. The group also posited a corollary to this confidence—there’s sufficient evidence to suggest that current vehicle sales are buoyed by pent-up demand that resulted from the effective shutdown of retail markets as the pandemic began, and a desire among some buyers to drive themselves to work and other obligations rather than using public transit systems.
The fourth “C” is tied to the first “C”—money is cheap in the current environment. When consumers need to finance a vehicle purchase, the interest rates are more favorable than they’ve been in anyone’s recent memory. The availability of cheap money also appears to be spurring home sales and mortgage refinancing, two additional signs of positive economic activity.
The Cox Automotive group reasoned that when you mix the four “Cs” together, you at least begin to have a plausible answer to the question of how/why retail sales remain strong despite the unprecedented market disruption we’ve seen in recent weeks.
Now, let’s touch on the second question—how long can or will the retail run last? When the Cox group discussed this question, we all agreed that, in the end, we don’t really have a good answer. But the discussion pointed to a couple factors that suggest the retail market may look different as unemployment benefits and bonuses run their course and we see an expected influx of wholesale supply from fleet and rental car companies in late summer and early fall.
The good news is that, as time passes, the Cox group will be keeping close tabs and reporting their insights to the industry. It’s our collective goal that whatever happens in the wholesale and retail markets, we’ll at least see early signs of what’s coming to help everyone adapt in sufficient time to make a positive difference.
The post How Four “Cs” Drive Strength in Retail Used Vehicle Demand appeared first on Dale Pollak.