For over a year now, dealers have been saying that wholesale used vehicle prices are “stupid high”. That’s a fair assessment. It is not fair, however, to say – as some analysts and journalists have – that used vehicle prices constitute a “bubble”. After all, even on the high side, were talking wholesale price increases of 30%. Not 300%!
A “bubble” (as truly defined) will never fully develop in the wholesale market because (for all intents and purposes) there is no real speculation, there is no hoarding, there are no future contracts, and there are no derivatives. Without such forces or instruments, a marketplace with a naturally short cycle (it’s about 30 days for used vehicles) will never develop bubbles – as they will deflate before being fully formed.
Trust me; you’ll never see a late-night TV pitchman saying that a significant portion of your 401K should be invested in used vehicles.
Now, this is not to argue that the run up in used vehicle prices has not been overdone. It surely has been in certain segments. But, finding true market values always entails the pendulum swinging too far left or right. And, a pendulum swinging back to equilibrium is not the same as a bubble popping.
So at some point, yes:
- rental car companies will report higher depreciation costs,
- what are considered today to be conservative loan-to-value ratios may actually prove to be lofty since they are calculated with an inflated denominator,
- commercial fleets will stop reporting large gains on end-of-service sales, and
- dealers will once again see aged inventory depreciate, rather than appreciate (holding vehicles too long will hurt – as it should).
But I believe most industry participants are fully aware of today’s unique market situation and that they will adjust very quickly and profitably when normal vehicle depreciation patterns return.