Falling Used Car Prices Could Hurt Dealers

May 31, 2011

Just like the above picture indicates, there used to be “good old days” in the car industry. However, which decade one considers to be the golden era is a relative issue. Fast forward to today: there is nothing good about the current used car market for many of those working so diligently at major or independent dealerships around the country. Prices have never been higher, creating a shortage of used cars to sell.

I just got off the phone with a good friend. He is currently a used car manager for a major car dealership and responsible for buying pre-owned vehicles and managing the inventory. At the moment his work life is tough. The shortage of good used cars is forcing him to work harder, yet his pre-owned inventory has never been smaller. There is justifiable pressure on him to find more cars to sell. His pre-owned inventory represents a significant profit center for the dealership and many paychecks are riding on his ability to do his job.

As a result of the tight used car market, my friend--along with most other professional used car buyers--has been paying sky-high prices at wholesale auctions. They are also paying inflated prices for trades, or when purchasing pre-owned vehicles outright.

But what if there is repeat of the used car disaster that happened at dealerships around the country in 2008 and 2009? That’s when the bottom fell out of the used car market and prices dropped quickly. At that time the price of gas was rising to astronomical levels, new car sales were down, financing vehicles was becoming increasingly more difficult, and the economy was crashing. Many car dealers saw the value of their used car inventories drop by 10 to 20 percent in a matter of months. They had bought high and had to sell low. Many dealers didn't have deep enough pockets to survive and went out of business.

Could it happen again?

What if our existing high gas prices begin to drop much more quickly than they have over the last few weeks? What if new car sales pick up, resulting in a slew of good trade-ins available for resale? And what if the economy kicks into overdrive creating jobs and reducing unemployment lines?

If these things come about, used car prices will probably drop significantly from their current, record-high levels. That would leave car dealers holding the bag with expensive and over-priced used car inventories. They would again be in a situation where they purchased their used car inventories at high prices, and were forced to sell at lower figures creating a financial loss. Would there be another shakeout of the retail car industry?

My friend told me that the likelihood of all those possibilities happening by the end of the year is negligible. However, he does worry that if some of these events come to pass, it will result in a significant reduction in current used car prices. His fear is that car dealers will still be left with a high-priced inventory while used car prices fall.

It was devastating for dealerships when this happened in 2008 and 2009. Would it be just as devastating for dealerships if it happened again? Time will tell.

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