Where Did All the Used Cars Go?
Here’s a scenario we’ve been hearing a lot of people tell us about lately: Some time after the novel coronavirus and COVID-19 pandemic hit the US, you realized you need to replace your vehicle. You were nervous about the health and safety risks of being exposed to the virus by interacting with private sellers, so you started looking around at dealership website since you knew they were taking lots of extra precautions to keep people safe. But you were surprised to find out there didn’t seem to be a very extensive selection at the first website you visited. Then you went to another that seemed to have even fewer cars. Several more dealer websites later, each with a disappointing inventory to browse, you found yourself asking this question: Where did all the used cars go? In this article we’ll describe what happening in many used car markets across the nation, and what it means for you as a used car shopper.
What in the World is Happening in the Used Car Market?
Everyone is painfully aware of how the pandemic has affected people’s lives and the economy, but those effects can be strangely confusing. There was the toilet paper shortage, for example. As it turns out, TP manufacturers can’t just press a button and make more, the factories have evolved to just keep up with what had been a constant level of demand for decades, including a well-known balance between at-work usage (call it “commercial” TP) and residential usage (home TP). With the lockdowns keeping people at home and away from work and all the other institutions and places where “commercial” TP would be used combined with a run on home TP, there was simply no way for TP makers to adjust to such a huge spike in home TP demand. Then there’s the growing shortage of coins in the economy. The US Mint hasn’t quite figured out how maintain the health and safety of the workers who make coins, and who knew the supply of coins was such a needed constant? Now there are signs at many businesses everywhere desperate for any coins they can get their hands on. How the pandemic’s impacts play out in any given industry or market can be very surprising.
This brings us to how the pandemic has affected the used car market. Many economists and industry insiders just assumed demand would decline sharply as people would be afraid to go used car shopping, which means there would be an oversupply of vehicles that would force used car values and prices to plummet. But pretty much the exact opposite is what has happened in the San Diego used car market, as well as many other used car markets around the nation. To understand what’s happening, you have to look at a variety of factors that affect the used car market:
New Car Sales: All the economic uncertainty caused by the pandemic means fewer people are shelling out for brand new cars. This also means fewer cars are being traded in, which is a primary source of vehicles in the used car supply chain.
Car Rental Fleets: Everyone thought Hertz going out of business would inject a bunch of cars into the used car market, but the impact of this has been extremely negligible. Why? First of all, most of the Hertz vehicles are stuck in ongoing bankruptcy proceedings, so most of them haven’t entered the market yet. Secondly, a huge source of used cars is when care rental companies replace their fleets. They buy a round of new vehicles and send vehicles they’re replacing into the used car market. But thanks again to a very down economy, many if not most of the car rental companies decided not to replace their fleets or replaced only a tiny portion of their fleet. People don’t realize how big a source this is in the used car supply chain. Compared to the number of vehicles that typically come from car rental fleet replacement, the vehicles that will eventually come into the market from Hertz going out of business will literally be less than a drop in the bucket of the used car supply.
Wholesale Auctions: Another major player in the used car supply chain are the wholesale auctions. Most dealerships have to rely heavily on those auctions to beef up their inventory of vehicles. But the auctions shut down hard when the pandemic hit and have yet to come back to full operation. They are doing some business, but it’s online only and the volume is mere fraction of what it used to be. This is another huge reduction in the supply of used cars.
Here’s the thing about these three major factors affecting the supply of used cars, they feed into each other and therefore create a kind of snowball effect. New car dealerships often send a lot of their trade-ins to the auctions because they might be a type of car they’re not interested in, but with the pinch in supply they’re hanging onto those cars for themselves, again reducing the usual flow of used cars in the supply chain. What we’ve seen in the San Diego used car market is how these factors reinforce each other and have resulted in a continuing downward spiral in used car supply. This probably isn’t going to change any time soon.