[ZERO] Auto dealerships are encountering a major problem where auction (wholesale) prices are increasing while real book values stagnate, squeezing profitability. To make sense of this, auto-guru CarDealershipGuy expanded on our tweet, pointing out that Manheim wholesale auto prices are re-accelerating while other indexes tracking prices were flat.
Here's what was revealed in the conversation as per the auto expert:
Manheim is tracking auctions. Dealers ARE paying more for cars. A LOT more. But the issue dealers are running into is SELLING those cars.
JD Power - one of the industry's main sources of Vehicle Book Values that auto lenders rely on to value collateral - hasn't materially adjusted upwards.
This has left dealers high-and-dry and without a profitable outlet for all the inventory they just acquired for OVER book value.
And that is leading to lots of dealers selling cars to consumers at a front-end LOSS (meaning, lose money on actual cars) while hoping to make it up on the back-end (with value-added products like warranties).
Speaking for myself, our vehicle purchase price has slightly RISEN but our ASP (average sale price) has barely budged.
Separately, CarDealershipGuy went even more in-depth about underwater auto dealerships in a recent blog post:
Cars are appreciating again and this presents problems for both dealerships and consumers. Here's why:
Ask any dealer and they will tell you that appreciating wholesale prices is a phenomenon we haven't seen since the craziness of 2021. There hasn't been a tax season where we've seen wholesale prices for mainstream, bread-and-butter cars at $3K above the "book value." [Book values are current wholesale and retail market price estimates provided by various publishers, such as NADA, Kelly Blue Book, Black Book, JD Power, and other companies]
Look at this example from a recent sale at an auction: