The USED Car Market Is Sounding The ALARM BELL | Episode 1009

It's noon here in Venture City, New Jersey, in New York, New York, a city so nice, they

named it twice, and this is Car Edge Live for Wednesday, February 11th, with your hosts,

me, Ray here in Venture City, and Zach hanging out in the WeWork offices in New York, New

York.

How are you today, handsome?

It's fantastic.

Happy Wednesday.

Thank you, everyone, for tuning in.

Today's show is brought to you by CarEdge.com, for those of you that are unfamiliar, boom.

There it is.

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We'll actually do the work to get you the real one.

Check it out, CarEdge.com, and as mentioned yesterday, we have a new page that is still

in beta.

I want to be very clear here, still in beta, CarEdge.com slash dealer dash ratings.

CarEdge.com slash dealer dash ratings.

Check this out.

We have taken all the OTD data.

We've captured from hundreds and thousands of car dealerships and started to build out

a transparency index.

Learn more about all the information we have back on this page, and please, my ask in sharing

this is to solicit feedback from our community.

Please share that with me in the comment section down below.

Now, Dad, the big story this morning is going to be talking about the used car market.

We referenced it a little bit on yesterday's show, the latest data from Blackbook showing

some really different trends than typically happen at this time of year.

Let's set the stage for today's show.

What happens to the used car market and used car prices in January, February, and March

of any given year, and why is what we're seeing right now, which is appreciation of used vehicle

prices in the month of February, a bit abnormal and a cause for a little bit of alarm bell

going off?

Well, what normally happens is you have tax season and spring selling season.

And the tax season, which is tax return season, a lot of those people use their tax returns

as either a down payment on a new car or a pre-owned car.

So pre-owned cars, typically we see a huge increase in pre-owned sales during tax season,

typically ends up running through the end of April, middle of May.

And historically, what we normally see is wholesale values the beginning of the year

going down to some degree.

They tend to grow or go lower, and this year what we're seeing is a spike in wholesale values

way earlier than what we've seen historically.

That to me indicates that perhaps the dealers understand that the spread between new and used

cars is that spread that's going to allow them to sell the used cars more quickly because people

can't afford the new cars, and so consequently, we're going to see the used car asking prices

go up because the dealers are paying up to buy the cars, and the appreciation we're seeing is

rather significant compared to historical levels.

So that's what's happening right now.

The alarm bell that's going off in the used car market is we are seeing wholesale prices of

used vehicles increase at a time when seasonally they do not in anticipation of what'll be the

spring selling season, which is when used car prices appreciate.

This chart shows you that during 2017 to 2019 this table, I should say,

the average depreciation for used vehicles in the car market was about a third of a point.

Now, last week used vehicle prices actually appreciated, and this week they appreciated

at almost twice that rate.

This is concerning, especially when you come down and we looked at this chart yesterday,

but we're going to frame it up again today.

This black line is showing you the price trends for wholesale used car sales,

and look at the other lines, orange was 24 and turquoise, excuse me, green is 2025.

We are seeing a divergence in this trend here.

We are seeing wholesale used car prices go up today when historically they don't go up for

another, I don't know, six weeks or so.

This is exactly being exacerbated by the fact that new car prices continue to climb higher.

Kelly Blue Book Report, new vehicle prices climb higher in January,

automakers cut incentives to help protect margins.

The reason we see used car wholesale prices going up and the reason we will continue to

see used car prices actually go up is because people cannot afford new vehicles, and at the

same time, new cars cannot be purchased by folks.

The manufacturers are actually choosing to protect their margins and not incentivize them more.

This has got catastrophic potential, man.

Alarm bells being sounded in very obvious ways demonstrating the inefficiency and impracticality

of today's auto industry in the United States.

Yeah, it is, to me, it's alarming because I suspect as dealers are paying more for these

used cars at the wholesale level that we're actually going to see a rather significant,

I predict, increase in asking prices, even though the retail asking prices.

Retail asking prices for those very vehicles.

Now, even though I suspect that retail asking prices on these pre-owned vehicles will go up,

there still will be a significant enough spread between those higher asking prices

and what people would have to spend to buy a comparable new car.

And we know people can't afford to buy those comparable new cars.

So people who were normally in the new car market will now find themselves in the two,

three, and four-year-old used car market, and they will have to pay more for those cars

than they would have in the past.

And I think the dealers are recognizing that, and they're building up their used car inventories

because of that. It sort of kind of reminds me of the 80s when there was an embargo of sorts

on the number of Japanese imports that could be brought into the country.

And I'll never forget my Nissan sales rep, Ralph Yoho was his name, and Ralph said,

you ain't going to get that many new cars, you need to get in the used car business.

And I think that's what dealers are looking at now. They're realizing that new car prices

are going to remain elevated and out of the reach of most people.

And so they're going to turn their attention to their used car operations and they're going to get

into the used car business because that's where their opportunities will be.

This is fascinating to me, Dad, that the decision from the automakers,

as new car prices have become more unaffordable, and as we've seen sales slow down.

Go watch yesterday's show, we led with the fact that there was an under 15 million unit

seasonally adjusted sales rate for the auto industry. What that means is that January sales,

if they were annualized for the year were 14.9 million, the industry pre pandemic was doing

17 and a half million. I want to be very clear here, I haven't seen 14.9,

and I think the six years I've been doing this, it has never been that low.

And in the same exact breath, we have this bullet point, automakers reduce sales incentives

in January. Last month, the average incentive package was equal to 6.5% of the average transaction

price, or roughly $3200 a year ago, incentives average 7.1%. December incentives average 7.5%.

Why is the used car market sounding an alarm bell? Because as all these things are happening on the

new car market, the leading indicator we have to your point, Dad, about what will happen to

retail asking prices for used cars is showing us that it is increasing at a faster rate and

earlier in the season than we'd seen in the past three years. Yes. Dude, maybe we should finally

do what we've talked about for many years, go buy a minivan or whatever it was. Remember when

minivan depreciated like 50% year over year? Yes. We could be setting the stage here for another used

car appreciation fest, where used cars become appreciating assets again because the manufacturers

are so stubborn on the new car market. Well, it's not that they're stubborn. Okay, let me rephrase

it. They are stubborn to a degree. Okay. And when the head loan was literally like to preserve

profits, they're not increasing incentives. Okay, but the underlying reason for that is to counteract

the increase in expense of tariffs. Yeah. Okay. So there's only so much margin built into a car,

whether you're manufacturing it or whether you buy it from the manufacturer and you sell it at a

retail level. And so the manufacturers have been trying to eat as much of the extra tariff costs

as they can. Well, guess what? A lot of these manufacturers have lost money because of that

and significant amounts of money. So what do they do? They, the means that they can't

underwrite the sales of these new vehicles with as large of incentives as they have in the past.

Like any other business, they have to look at ways to conserve cash. They have to look at ways to

preserve profitability. So if that's the case and we know it is, then yeah, they're forced to

continue to build high profit margin expensive vehicles that will appeal to fewer and fewer

people because it just cuts the vast majority of Americans out of the market. And new car

dealers are realizing that. And so they're going to get strongly involved in their used car business

again because that's where the opportunity will be. If a person needs a car and they absolutely

positively cannot afford the new one because the incentives are less or the asking prices are too

high, well, where do they turn? They have to turn to a pre-owned car. And what are we seeing on the

pre-owned market? The actual price appreciation is most significant against what segment of vehicles

older and less expensive ones. The squeezing here of value is incredible because again,

where you have the most, it's supply and demand, all aspects of the car market are supply and demand

where you have the most demand are for affordable, reliable modes of transportation. And where you

have the least amount of supply is exactly there. The age of the fleet in the United States is over

14 years old all of a sudden. People are just holding on to vehicles longer and longer. And to

your point, Dad, the new cars that are coming into the function are coming into the dance.

Those new cars are more expensive inherently because of tariffs and obviously because of

automaker decisions to go up market. They are also cheaper in quality. And the reason I bring that

up is look at this headline in automotive news. The embossed that cuts invisible costs on Mazda

CX-5 to protect margins from tariffs restore profitability. Invisible costs. This is hilarious,

y'all. We're just going to read the bullet points. Mazda cut unseen costs in the redesigned CX-5 to

protect margins from tariffs. A steering wheel stitching change is one of many cost efficiencies

customers won't notice. The new CX-5 adds value in customer-facing areas including the center stack

screen and Google connectivity. The CX-5's launch was delayed for quality verification of sophisticated

software system. You literally scroll down one more line here and it literally says we are going to

have a simpler steering aspect to our vehicles, which will help offset the tariffs. So quality is

actually what's going to suffer here. Unseen visible costs. No, you're going to get worse quality.

Well, it's not necessarily worse quality. There are certain things that some manufacturers do to

differentiate themselves from others. Okay, and one of the things that Mazda did was the way that

they stitched the leather on the steering wheel. It was a much more expensive way to do it than

their competitors are doing it. And truth be told, ain't no customer buying that Mazda simply because

of the way the steering wheel was stitched. And there ain't any customer out there that won't

buy a new Mazda because the steering wheel is stitched just like its competitors now. So you

have to make a determination as a manufacturer. Yes, we want to differentiate ourselves. Are the

differentiators enough to move people? And in many, many cases, they're not. So, you know, those

things that you think were important. And I'll never forget when I had representatives from

Aldi wandering through our complex in Scottsdale, Arizona, the Penske complex there. And, you know,

I was talking to these folks and they're pointing things out to me on the accuracy in my showroom

going, well, we would never allow this at Aldi. It's more expensive for us to do it the way we

do it because we would never allow this. It's not anything that would sway a customer to spend

more to buy the Aldi. Okay. And so, these are just things that it's nice to do, but the customers

don't even understand it. It doesn't really matter. So, I get what they're doing. You have to find

creative ways to cut your expenses on these vehicles if you're going to maintain your profit

margins. And they're getting squeezed. And it's not the cheaper things are going in the car, per se.

It's less expensive ways to build it that don't really matter to a customer.

I will say if it's that, then it's probably the other as well. I bet you there's a mixture of

we're finding things that don't actually add value to customers and we're finding ways to make things

cheaper. One of the ways I could drive this as a proxy argument would be we've seen recalls

increase significantly ever since the COVID pandemic. I think that is a function of, obviously,

ways of working evolve during the pandemic, but also a flight to poor quality. It was a matter of

we could just get components to even produce vehicles. We're going to produce them. So,

I do as a consumer dad have concerns that in this new world that we are operating in where

automakers are producing new cars that are unaffordable for people and they are not willing

to offer many of them. Some of them are, but many are not willing to offer incentives like

they used to to get people to purchase these vehicles. The government has also demonstrated

a lack of willingness to subsidize the purchase of certain types of vehicles that they are going

to find ways to make them cheaper. Two of the ways that they will do that will be removing

features that no one even found valuable. You are Mazda, let's see right now. I take your word

for it that the stitching did not influence your decision to lease that vehicle and they're probably

also going to find ways to make the stuff cheaper because now there are tariffs and even if there

weren't tariffs, it's capitalism. Maybe we got to figure out ways to make some cheaper and we

can make more money. I do want to pull up here dad. Yes. Something that has been shocking

to you and me in all the years that we have done this and more respect to the people that

continue to keep this market afloat. Popular full-size pickup trucks that the average MSRP

in January for a full-size pickup truck was again above $70,000 for the fifth consecutive month.

150,000 F-150s were sold, or 150,000 full-size pickup trucks were sold.

Subcomprax vehicles, average MSRP less than $26,000, only 4,000 subcompact cars were sold last

month. I simply wanted to bring this up because we do this to ourselves. There are some options

limited, but there are some options that are more affordable. For many of us that are out there who

cannot afford a $70,000 pickup truck, although the latest data we have that demonstrates and

shows what's going on with regards to credit, it very clearly depicts here loan term length,

the share of loans that were with terms greater than 72 months increased from 27.5 to 28 and

is up 400 basis points here over here. At the same exact time, the proportion of borrowers with

negative equity increased by 220 basis points a month over a month to 56.3. That's 470 basis points

year over year. Even though there are people out there who can't afford using air quotes here,

$70,000 pickup trucks, because again, the data that shows us that they can afford it is longer

loan terms and rolling over more negative equity, they are sustaining this operating environment

to make 150,000 full-size pickup trucks instead of the more affordable subcompact cars.

Crazy to look at that landscape as well. Okay, but here's the interesting

thing when you discuss that. What is the percentage of vehicles offered at the $70,000 price point

as compared to the percentage of vehicles offered at the under $30,000 price point?

My guess is, and this is a guess, that there's probably 8 to 10% of all the vehicles that are

available will fall under $30,000, and that probably 50% of all the vehicles offered will

fall in the $70,000 range. So we've got $272,000 sub $30,000 new cars for sale in the United

States of America right now, $272,000. Okay. And then you said, what was it, over 70?

Yes. $500,000. It's double. So yes, there's the percentage of lower priced vehicles

that are being offered, excuse me, is significantly lower than the percentage

of $70,000 plus vehicles that are being offered. Well, if you have less availability

and my guess is on many of those that are in short supply, dealers are asking for more,

then it becomes even harder for those folks to be able to buy one. There isn't as much availability.

So what it points out to me is that the manufacturers understand that the size of the

swimming pool is getting smaller, but that those that are still utilizing the pool have

the wherewithal to buy $70,000 plus vehicles. But they're doing it on extended credit terms,

and they're rolling over more negative equity, which is something we've been talking about

for a long time. This industry just continues to kick the can down the road of problems that

they're going to face. At a certain point, there's no more road to kick the can down.

Okay, because you've just, you've run to the end of the road, and then you have to look at real

new ways in order to be able to maintain any type of growth whatsoever.

So we can't continue to have people increase the amount of negative equity that they're carrying

with every purchase. We can't really afford to have people continue to extend the term loan

rate or the term, the loan term length, because that'll just exacerbate the negative equity.

And at a certain point, it just comes to a halt, and then you have to address the underlying

issues. And the underlying issues for many of these manufacturers right now is figuring out

ways to recoup their losses from their EV bet. And I saw some comments yesterday, and people were

saying, well, it's the government's fault. That's why all these manufacturers jumped as quickly as

they did. Well, I don't know. I'm going to think of the largest manufacturer in the world. They

didn't jump quite as quickly, and that's Toyota. They were biding their time when everybody else

was investing billions upon billions upon billions in the EV bet. And they were saying, well, you

know what, we think it's going to be hybrid. So regardless of how much pressure there might have

been or the manufacturers thought there was from governments, the biggest one said, well, you know

we're going slow. So I get it, but I don't get it. You have to understand your positioning

before you jump in. Now, Dad, you mentioned this, and then I want to switch gears. The EV

underwriting has really hurt many of these legacy automakers. The Lancet's credit rating was actually

cut by Moody's. So their credit worthiness has been downgraded by one of these reviewers, Moody's

here. After the Lancet's had to write off $26 billion, Ford Reno had to write off $19.5 billion.

So yeah, the EV decision in many ways has not served these automakers. Again, at the outset of

today's show, I shared a new project that is still in beta, caredge.com slash dealer dash

ratings. Now, one of the things I want to show here, Dad, is you can find dealers who are adding

add-ons and dealers who are not. So I'm going to look here at grade D dealers for a moment. And the

way that this works is very simple. And I am again, bringing this up in service of getting feedback

from our community. What I need you to do is come onto this website and search around, find a dealer

and see what they're doing. So in this case, we've got some used vehicles that this dealership's

selling, some new ones as well. We can actually view, let me pull this open really quickly,

the original out the door price worksheet that will then show you what this dealership is doing.

So you can see this particular dealership, Dad, adds dealer prep with LUX membership.

Oh, I've always wanted a LUX membership. And you can see here on this dealer page,

what packages they're adding. So they also add the Grubbs protection package

and load jack and decision upgrade. I just want to know if that's regular LUX or Nova LUX. I'll

know that's a lot. Exactly. Please, y'all, this is again in beta. This is brand new. And this is

the first way that we've been able to bring all of the information. So to be clear here,

this data is coming from our AI agent that is reaching out on behalf of CarEdge Pro customers.

It is reaching out to thousands of dealerships. We've actually had multi-round negotiations

with over 8,000 dealerships. And what that actually yields in terms of savings,

that agent has saved over $14.7 million on average $2,596, 70% of the time,

actually nice. And it's successful in its negotiation. Almost 20,000 hours saved. And you

can see the persistence pays off when the agent has these negotiations. It saves some serious money.

It doesn't work every time. About a third of the time, the dealership did not actually decrease

their price when the agent negotiated. But you can see when it works, it works. And so I bring

this up because this data, I think, Dad has the potential to really, really level the playing

field for consumers and for good dealers. So again, this is brand new. This is in beta,

CarEdge.com slash dealer dash ratings. Look forward to seeing more feedback. And hopefully,

we can help people work with good dealerships. That's the intent here is find good dealers

and avoid the bad ones. And you know what the other intent would be is to get the bad dealers to

finally realize that they need to be good and everything else that it's now costing them.

And they need to change the way they operate. It is an attempt to bring dealerships kicking

and screaming into the 21st century and finally providing customers with the way they want to

buy cars as opposed to the way the dealers want to be able to sell them. So I think this type of

information will be both valuable to customers and to operators. And operators that want to ignore it

eventually will find themselves out of business because you can't just bury your head in the

sand and not know what's going on. I completely agree. I'm really passionate about this project.

Again, it's in beta. So small audience here, a couple hundred of us. I seek your feedback.

I seek your input. My email is Zach at CarEdge.com. Please send me feedback there directly as well.

I think this has the potential to really change some things for the auto industry and obviously

for our community. So please share your feedback. It is greatly appreciated. Now that's called a

show for today. We'll be back with more CarEdge live tomorrow. I am certain there will be something

we will want to talk about. For those of you who are unfamiliar, check out the website, subscribe

to the channel and share this with a friend. We appreciate and only are capable of doing this

because you choose to show up and spend time with us. Thank you so much. Yep. Thank you,

everybody. Have a great day. And we look forward to seeing you all back here with, well, all your

friends tomorrow at noon Eastern. If you liked the show, please take a moment to rate, review,

and subscribe. It really does help the show to grow. Thank you for listening.

The USED Car Market Is Sounding The ALARM BELL | Episode 1009

About this episode

OTD

transparency index

new car prices

incentives

used car wholesale prices

margins

auto industry inefficiency

retail asking prices

pre-owned vehicles

new car market

seasonally adjusted sales rate

incentive package

transaction price

used car market

depreciation

tariffs

profit margin

pre-owned car

supply and demand

age of the fleet

Mazda Cx5

cost efficiencies

steering wheel

MSRP

full-size pickup truck

negative equity

hybrid

credit rating

Moody's

add-ons

out-the-door price

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