Danger! Risk of falling wholesale values

May 5, 2009

Clearly we are operating in uncharted waters in the wake of the Chrysler bankruptcy and closures of Saturn, Hummer and Saab brands. As a result, there is limited past experience as to what happens from here with respect to the wholesale value of these used vehicles. In this week’s Automotive News, I read an article that Group One has ordered their non-Chrysler dealerships to stop stocking used Chryslers. Their theory is that many Chrysler dealers losing their franchise and/or otherwise in economic distress will be forced to take their new vehicle inventory to the wholesale marketplace for liquidation. I’m personally not sure that dealerships that lose their franchise will need to resort to such desperate means. I assume that a reasonable bankruptcy judge would allow Chrysler to buy back the new car inventory of terminated dealers. There still, however, may be some new car inventory turning up in the wholesale marketplace, and that presents a risk to the value of late model used inventory. Ironically, this comes at a point and time when the floor values of late model Chryslers at the auctions are being pushed higher and higher.

This morning, I received information that Wachovia has issued a memorandum to its dealers stating that it will finance no more than 70% of NADA average wholesale value on used Chryslers. I’ve also received unconfirmed reports that Chase may be following suit. I’ve also heard that some major lending institutions will only finance 90% of triple net on these same new vehicles. If these caps are real, they will most certainly cause wholesale values to fall. Buyers who purchase such vehicles in the wholesale marketplace without knowledge of their possible finance limitations may find themselves with vehicles that are difficult to move and over valued. While we can’t be assured of the psychological affect of bankruptcy or brand phase outs, we must pay close attention to the willingness of financial institutions to fund deals as a harbinger of the used wholesale values.