Vehicle Shortages Explained, Car Price Predictions & That Time CDG Bought 50 Chevys

Full transcript from Episode 9 of the CDG Podcast feat. Jonathan Smoke, Chief Economist of Cox Automotive.


() Our unique market environment
() Jonathan's background
() The Great Digitization
() That time CDG bought 50 Chevys at auction
() Are we in a K-shaped recovery?
() Domestic vs International supply constraints
() When do we get back to 2019 price levels?
() Forecasting new vs used car prices
() Advising a new car buyer
() Jonathan's take on EVs
() DJ Smoke's recommended listening


This transcript has been edited for brevity and clarity

Our unique market environment

CDG: Alright, Jon Smoke on the pod. Jon, did you ever imagine that car prices would be moving like a stock market? This is the number one conversation I'm having with dealers nowadays. I'm looking at my inventory. It's like a meme stock going up and down every day. What is going on? Tell me, how do you perceive this?
JS: Yeah, I definitely would never have projected all of the things that were necessary to give us the environment that produced the increase in car values that we saw mainly through the pandemic. Although, coming into the auto industry. I did learn very quickly that it is natural for car prices to go up. There's a phenomenon every spring in tax refund season that wholesale used vehicle values always appreciate. It has happened every single year in the 27 years Manheim has been tracking it. So, it is always possible, but the the unique conditions to shut down every factory in the world and simultaneously boost demand is really what gave us what we've experienced over the last couple of years. And we're still slowly seeing some things return to normal and give us more of a track that we can follow and predict more accurately. But this is certainly uncharted territory for all of us.
CDG: What does that depreciation curve look like for a used vehicle?
JS: So at an individual car level, usually a car loses about 12% of value. In pre-pandemic times, it was miraculous, actually, how 12% became the average across all model years. Now, technically, model years vary a little bit, and so you do tend to see older vehicles, especially vehicles that are five years of age or older, very consistently deliver that amount of appreciation and always stay in very close relationship to mileage as as well, so they're very, very predictable. The nuances that we see throughout the year, I mentioned during the spring, we normally see wholesale used vehicle values go up. That's because tax refunds drive an inordinate amount of demand in the spring. So, basically, every year you tend to have 6 to 10 weeks of wholesale prices going up because even though that time of year is pretty well known and and predictable, it's impossible to line up the supply to address it perfectly. So as a result, within a calendar year, you usually have less depreciation in the first half of the year because you've got that strange period of time where values are stable or even going up. And so as a result, vehicles tend to lose more of their value in the second half of the year. That also coincides when new vehicles are typically have their new models coming out, and when new models are coming out, the older version of the new models that are in normal times still sitting on dealer lots get heavy incentives and more discounting. That's also part of the reason why there's usually more depreciation in the back half of the year.

Jonathan's background

CDG: I'm curious, as you've sort of been in this position where, or let's just say your job has gotten a lot more interesting in the last couple of years. And I'm just going to guess that based on how my job has got interesting. But tell us about, how did you even get here? What is your background and what did you do prior to this? How did you get your current position? I think that context is important before we dig deeper into the economy and the broader car market.
JS: Yeah, my journey to get to where I am today was certainly not a straight path. First of all, I never sought out to be an economist. I studied economics and I loved economics, but I was a very practical, want to have an impact on the world, wanting to see results. And no way did I want to go down an academic path. That was pretty much what I thought the economics world was. So, I worked for a year, ended up then going to graduate school, got an MBA, and went into management consulting in the nineties. And as is the case for anybody that's ever been a management consultant, my first project happened to be with a homebuilding company and on my second assignment, six months in at another real estate related company. That made me a "real estate expert." So, I was destined to be in that homebuilding and real estate category.
CDG: I was checking out your LinkedIn and I was looking for the background. It was an interesting, interesting path over here.
JS: Yeah. I was in that industry first as a consultant, and then I ended up working in a corporate office of what became a top five large public homebuilding company in the country. Eventually, in my position, I basically saw how critical it was to have data to drive decisions that we were making. Because in homebuilding, if you mess up on buying the land and you overpay or you buy in the wrong location, you just screwed results for the next 5 to 10 years. And it is amazing, especially back when I started in that industry in the mid-nineties, how limited information was being used to really drive decision making. So I ended up being responsible for strategy and basically built up an economics team and started to work with well known economists like Mark Zandi at Moody's Analytics, and using that data to help us make decisions. Then, I decided back in 2006 to take my ideas and form my own company. So I started a website, started to do some things, and it was going brilliantly until the Great Recession unfolded. I ended up having to sell my business to a company that eventually named me Chief Economist because of what I was doing with our data and working with clients. That ultimately, eventually got me as the first Chief Economist for in the real estate space. And boy, those were the years where Zillow, Trulia, Redfin, were really–it was an arms race on the economics and analytics side. Then, I learned about the opportunity at Cox and people said I was crazy because I was leaving what I had spent over 20 years developing a reputation in real estate. But I had always loved cars. I thought it was an incredible opportunity to have a position with Cox, which was known to me personally. I lived in Atlanta for quite a while and knew lots of folks in various parts of Cox. Plus, as a data guy, at the end of the day, you couldn't dream of a place that's better for having unique, detailed proprietary insights into every corner of the automotive business. So I jumped at the opportunity. I've been here a little over six years, and you're absolutely right. It has been a very interesting time, certainly one also to be an economist and just, more broadly looking at the economy and all the things that have been impacting us. But, I have zero regrets. This has been a wonderful place to be.

The Great Digitization

CDG: So, six years. Now, the business has transformed an incredible amount just in the past couple of years. I think there's no doubt about it. In the 2000s, we saw the rise of the Internet and websites. And then in the early 2010s, we got this kind of reinvented online car buying. In 2013, you had Shift, you had Vroom, you had Carvana. But I mean, in the last six years, what have been the most impactful changes or transformations that you've witnessed in the car business?
JS: Well, I think, absolutely – Digitization, the movement to transacting completely online. The pandemic forced that issue on the wholesale side and the business-to-business side in a way that I don't know if we ever would have been able to get some dealers to consider transacting the way that they now transact naturally today, because basically close to 80% of the transactions at Manheim are now digital in some form or fashion. And this was a business that up until the pandemic started, was really struggling with the idea of letting go with the good old days and the people that would talk about the fried chicken at Manheim, and the experience of being there on sale day. Don't get me wrong, as an economist, watching a vehicle auction and especially being at the biggest lots in the country like Atlanta, Riverside, California, Manheim, P.A.. There was nothing quite watching 36 lanes with simultaneous bidding and what was taking place. So, the movement to digital, there's no question that has been the biggest transformative change. And it's one that's still ongoing. You know, we haven't seen the end of that.
CDG: Why do you like that? This is what I want to understand, what's your take on the movement to digital here? I think it's a very controversial within the industry now. Different players within the industry have different opinions, but what's your perspective?
JS: Yeah, I would say I don't necessarily have a strong opinion like I'm rooting for one side or the other. There is definitely benefits to a data guy though. The more digital a transaction is, the more information that's being captured and insights that we can leverage. In fact, information becomes part and parcel of of people's decision making. So, to me, that's probably a huge improvement and I love the idea of being a part of this and helping the industry.

That time CDG bought 50 Chevys at auction

CDG: You mentioned the fried chicken at Manheim. Listen, I've been to Manheim, Pennsylvania more times than I can count. So, when did you start at Cox? 2017, was it?
JS: Yeah, early in 2017.
CDG: Okay, so I'll tell you a secret. In 2016, I want to say, maybe even 2015, I won't forget this because we found – I want to say it was Hertz – or someone was having a big sale and they were selling a bunch of inexpensive Chevy's and stuff like that. I just won't forget that the price disparities were so great. It was like the first time where we're like, "Wow, we just got in like insane deals at an auction," and it really fit our market very well. All of our margins on those cars were definitely better than other sales on a relative basis. I don't forget that sale or that entire period because I just remember how we bought 50 Chevys in a single sale or two sales or something. And I remember the sales team was like, "What the fuck is going on? What are you guys doing buying?" But we're like, "No, no, trust me, these are purchased so well like an idiot could sell them." And it was exactly what happened. I won't lie, I miss that. I mean, who wouldn't have missed that? That was the last year because I remember every year after that, it just got more competitive. There were more venture dollars flowing into the space. Cars were being bid up closer to their fair market price or even higher. That was for me, as you know, having been in the business for a while. That was the last year. I remember we were like, wow, Like there's this inefficiency that no one knows about. I felt like I had a secret, you know?
JS: Indeed.
CDG: So along with that, I didn't eat the fried chicken, but I did love the eggs and the hamburgers. They were great. I know exactly what you were talking about. Alright, enough about me. I think what you said about the industry transforming digital is correct. COVID-induced adoption has been just incredible, right? The lockdowns, all that. That's like a dream come true in order to get tech adoption.

Are we in a K-shaped recovery?

CDG: I think another question that I'm getting a lot now, because this has obviously had a big impact on the market, do you think that this has led us now into a forever K-shaped market? And what I mean by that, for the audience, and you of course know is – car prices nowadays, you have new cars at record highs or close to record highs, used cars close to record highs. Rates, of course, are at, I don't know, decade highs. You know better than me.
JS: 20 year highs.
CDG: 20 year highs. There you go. What's next for the business? How should someone think about this, whether a dealer or a consumer? When it comes to car prices, what do you see on the horizon for new cars and used cars in the next couple of years?
JS: Well, fundamentally, this is a a still very supply constrained market and one that is not–
CDG: Why? I'm sorry to cut off, but why? People think that Toyota is colluding with Kia. What's the deal right now? By the way, I'm not saying that's true. I'm just saying what people are DMing me and rumors. But, how are we still supply-constrained three years after lockdowns?
JS: Well, it's kind of like how we started. Would you have envisioned a world in which the prices went up the way that they did? And the answer is no, because no one with a sane mind four years ago would have said, okay, we're going to shut every factory in the world down. Simultaneously, we're going to unleash the possibility for everyone that has a job in the United States to work remotely and choose to live perhaps in less population dense areas and become even more car dependent when the whole world was trying to sell us in 2017 that we were at peak vehicle ownership and vehicle ownership was inevitably going to be replaced by miles and miles of autonomous taxis that were going to take us everywhere. So, we've ended up in a world that, over the last four years, the car park, or what we call in the industry the number of vehicles that are available out there, which is every new vehicle and every existing vehicle that's registered and being operated, has essentially not changed when in the prior ten years we were averaging adding 4 to 5 million vehicles a year to the car park. That's the difference between new vehicle production and sales into the car park, minus the number of vehicles we lose, or the scrappage rate. So effectively, the pie didn't change, but yet we simultaneously increased demand because population was growing, jobs were growing. Through that time, more licensed drivers were growing and as I mentioned, people were actually moving away from places that they could depend on public transportation more and moving to places that were far more car-dependent.
CDG: Exhibit A.
JS: You did it, too, huh?
CDG: I did exactly that. Exactly. I said, I'm out. I am not staying here.
JS Yeah. And so, the end result has been this disconnect between supply and demand. Then we had the invasion of Ukraine and a series of things last year that basically caused the ability for new vehicle production to just bounce back. It's been a very difficult path for vehicle production to recover. So instead of popping right back to 17 million, we actually declined last year because you had an earthquake in Japan, you had COVID lockdowns in China that really impacted much of Asian production. You had the war in Ukraine really disrupting things in Europe. Even though the war itself wasn't necessarily impacting factories directly, it was raising the costs of energy and all kinds of things that essentially all conspired, if you will, to limit what could be what could be done. And yet, we had $4 trillion in stimulus put into the economy where it's zero interest rate policy for the Fed to keep the economy going. You had just perfect conditions to not only have people becoming more car-dependent because of not wanting to take public transportation or moving to places that were more car-dependent, but you actually had an abnormal environment that otherwise would have predicted that vehicle demand was going to be boosted simply because of a consumer's economic situation and the level of interest rates and how easy it was to get credit. And we're still not back to that level of production that would cause even the new car market to be at equilibrium with supply and demand. We just this year crossed the point where consumers are actually paying less than sticker for vehicles and that was an unheard of concept prior to the last couple of years.
CDG: I saw you guys put out that insight. I tweeted that.
JS: Yeah.

Domestic vs International supply constraints

CDG: So I want to double click on one thing. You said we're still not back. Explain that to the average person. Why does Ford or Chevy have vehicles or, Jeep have supply, but Toyota, Honda, Kia, Lexus don't? Toyota is the number one retailer by units or volume, so I understand you sell more, but just explain to us how have the domestic brands rebounded so well, whereas the Asia brands have not.
JS: Well, there's a global/regional lens to this. You had unique circumstances in Asia that basically caused that recovery and production to be furthest behind and running into issues that made them actually lose ground in some cases last year. That was particularly for a lot of the Japanese production, because a lot of their supply chain was more dependent on China, a little bit more dependent on the region that was having a much tougher time "getting back to normal." The other end of the spectrum here in North America, we were blessed to get the vaccines earlier, to see people returning to more normal activities. So, a lot of our factories and a lot of our supply chains improved. But even so, Stellantis, Ford, GM, they still had components that for decades, ever since the original NAFTA was created, the entire industry was very focused on where is the cheapest possible place in the world to produce every single component and have them all come together in the assembly of the vehicle. Well, COVID taught the industry and the entire manufacturing world that there's a price to pay when you have actual disruptions to transportation and factory production. So we now see manufacturing going from that world that was absolutely focused on the lowest cost and the single best place to produce something to something that's a bit more resilient and able to withstand disruptions. That is adding an additional layer of time that it takes to get us "back to 100% production levels." Then, the third component is labor. Even in North America, we're not recovered on labor because guess what? We've had a labor shortage. We have the lowest unemployment rate since the Korean War. So, no one on this podcast and probably no one listening this podcast was alive the last time the unemployment rate was lower than it is right now. And when you add that we've got a strike potentially coming with the UAW this September with Stellantis firmly in its target, you basically have a scenario that even the North American production wasn't as aggressive as it typically would have been in trying to hire people and getting factories back up to three shifts and running production. Oh, and by the way, we're changing to electric vehicles and that causes retooling and changes at every part of the entire ecosystem. That too creates a layer of change that I think really made it difficult for us to snap back. So, at the tip of the funnel, that's where new vehicle production is. We need to be at 17 million to really offset the deficit that's been happening at the top. Then, in the used market, particularly in what we see at Manheim and in wholesale, what is being driven for the wholesale market that feeds used retail is really a product of what has happened in the new market over the last three years, and where the market has been most starved are in the channels that traditionally feed the wholesale market and feed the used retail market, namely sales into fleets, sales into rental, and sales into leases. We've got such a deficit there that when you add both new and used together, we don't think it's possible for us to get to some "normal space" for at least five years. That's how long it's going to take.
CDG: OK. You dropped a lot of knowledge bombs here. So, "normal space" within five years. That's something I wanted to ask you, but before we get there, the first question I asked you is about Domestic vs Asian brands. You mentioned three different components that have created this shortage. But, what I want to understand is the dealer down the street from you right now has plenty of Jeeps in stock, but the Toyota dealer next door does not. Is that mainly a component of present-day demand, simply that that Toyota has more demand than that Jeep? Or is it just domestic brands have done a better job at rebounding their manufacturing facilities?
JS: So, there's a supply component to what you're describing and a demand component with those two brands specifically called out. On the supply side, there is no question, North American production, whether it's the traditional domestic brands or some of the brands that rely more heavily on North American production, are in a much better place and are much more likely to be closer to the level of production they had in 2019 right now than, say, the factories that are producing vehicles in Japan, Korea or Europe.
CDG: That shocks me, because all I learned about my whole life was Toyota, they're the cream of the crop. I don't know, I would have thought that they would figure out their manufacturing better and earlier than anyone else.
JS: Well, they had some bad luck. I mentioned, and it's sort of dismissed a lot, but there was an earthquake early last year that hit Japan and impacted some of their supply chain and in particular, their access to semiconductors. So, it set them back. There was a while, especially in the first half of 2021, it looked like Toyota had planned this perfectly and was going to navigate the supply issues, take share from all the other brands, and that pretty much ended up being the case for calendar year of '21, but boy did that story change last year, and that it was more a function of a lot of bad luck. And when you look at the day supply, and we publish that information every week, we still see Toyota at the very bottom. Jeep and Ram are at the other end of the spectrum. Historically, Toyota has been close to the bottom. They are used to working in a low environment, but it's abnormally low now. And a lot of that has to do with really bad luck that impacted Toyota and some of their counterparts in Asia more than it did the North American brands.
CDG: Definitely.
JS: But there is a demand component to this too.
CDG: Yeah, and I figured that, but I was wondering how much of it is really demand versus supply. I just figured that they would figure out supply faster and better. I think you hit the nail on the head.

When do we get back to 2019 price levels?

CDG: So, you just said something very concerning I think to a lot of people. You said five years to normalization... What the heck does that mean? Like, what is normalization? Do we get back to pre-COVID price levels? What does that really mean? Let's double click on that.
JS: Yeah. Well, I love you brought that up because I get that question all the time. "When are we going to get back to 2019 prices?"
CDG: Drumroll.
JS: The answer to that question...
[Drumroll continues]
JS: never.
CDG: By the way, I give the same answer, but I'm curious to see how you're going to answer that.
JS: Well, at no point in history, and we've got examples, like after big hurricanes that destroy a large amount of vehicles and there's demand to replace those vehicles happening at the same time, there has never been a case that an increase in prices results in prices in the vehicle market going back to what they once were. Vehicle prices are very sticky, and it's more that you have step changes in what occurs and in the prices, especially in a world that is supply-constrained. And there is no question that we are supply-constrained. So, when I talk about it taking five years, it's the holistic view. When you look at what the path for new vehicle production is going to be, and it's probably the new vehicle market will be getting closer to the possibility of 17 million in less time, let's say three years.There's definitely a willingness.
CDG: Just to tell the audience, 17 million is considered normal, right? 17 million new units sold per year. That's considered more or less normal.
JS: That's right. That's right. And we think it's going to be a struggle to get there because you've got these other issues that we were just talking about. There are still lingering on the supply chain side. The movement to electrification means retooling of factories. The de-globalization takes some capacity out. You've got costs relentlessly going up on that side, too. That suggests that maybe we're going to be in a lower volume environment in order to address the fact that affordability has has been or is reduced as well. So, it's not necessarily going to be a snap back to 17 plus the way that prior recoveries might have played out, but it's the wholesale and the used side that takes the longest amount of time to completely normalize. And what does that mean? It means the used car market is going to be limited in potential for the number of transactions that occur, which means that for dealers that have really focused more on the used car market over the last five years, say, especially franchised dealers, maintaining growth and maintaining the level of volumes and revenue that they got from their used car department is going to be much more challenging and much more competitive because we've got a lack of younger vehicles. That means virtually every dealer is competing for vehicles that are 5 to 10 years of age, which used to have unique lanes.
CDG: For people listening, in dealership terms, used cars is going to shit.
CDG: I'm just kidding.
JS: I wouldn't say it's going to shit, because it's really one that is still going to have positive dynamics, because dealers are awesome entrepreneurs and they know how to respond to the market. We're always seeing evidence of this. How are they dealing with the more limited market? They're reducing overall levels of inventory, and they're turning inventory far more rapidly. We're seeing turns that are probably meaning that most dealers are focused on 30 days or less for their typical turn on inventory.So, as a result, as the market sees periods of strength like we had at the very beginning of the year, or when the market starts to see slowing down like we've been experiencing over roughly the last six weeks, dealers can more rapidly adjust.
CDG: Are you seeing anything else? Are there any other ways dealers are responding to the lack of inventory in the market?
JS: I think looking for ways to be as productive and as efficient as possible, that is a consideration. You know, service is an area that I haven't heard you actually talk about much on your podcast yet.
CDG: You said the service department?
JS: Service. Yeah. Yeah.
CDG: Oh, I have some great stuff coming up for service. I very strategically plan the segments. I have really good stuff on wholesale coming up. Just wait. It's going to be really good.
JS: Alright.
CDG: We're gonna talk about that a lot.
JS: Well, you'll have to have me back to maybe do some color commentary on what we see.
CDG: Yeah, I mean, we could do this quarterly. This could definitely be a recurring thing. I'm sure people will love it. But yeah, I think I've been very – look, we're used-only. We're feeling the headwinds. Especially if you skew more near subprime on credit spectrum of consumers, it's very tough out there, I would say. I see friends and dealers that are, maybe they're in the south, or they sell trucks, or $30,000 plus vehicles. Actually, their business has been a lot more consistent on the used side. And, of course, finance-ability or approve-ability for their customers has been better. So that's sort of what I've been seeing there. There's no doubt about it, that everything you just said is correct. Less inventory, fewer cars, focusing on efficiencies elsewhere, putting more focus on–Well, let's talk about who's getting squeezed. I can tell you straight up who's getting squeezed. Our vendors are getting squeezed, especially if you're not a vendor that's generating more cash flow, whether it be just some organizational tool, something for project management, I mean, anything like that, you're you're likely getting squeezed. And by squeezed, I mean we're trying to look at renegotiation, finding a different vendor or whatever it is. We need to make sure that not only are we preserving our margins, but we're increasing our margins at a time like this where volume is down. Volume has been the biggest challenge for us, not so much the margins, but volume. We're selling a lot less cars that we would have at any April or May in any prior year. If you go back to 2019, we're selling fewer cars than in 2018. So, it's been very, very challenging. Having had conversations, I've been very vocal about, just diversify. I think that you're right. Everyone that invested so heavily in used over the past couple of years is entering a very challenging period where you're likely not going to see top line growth, or you're going to have to struggle to even get there.
JS: Our baseline forecasts, throwing out the possibility of recession, says that the retail used market will not change over the next two years, that we're at this level driven mainly by supply constraints, but also recognizing the affordability challenges of what's likely to be the case with interest rates.
CDG: You said "not change," as in, units will not grow? Is that what you mean?
JS: Units will not grow, that's right.
CDG: And what are you forecasting for annual unit sales, used?
JS: In the actual total number, we're in the 36 million total, which includes private party. Retail is slowly crawling its way up towards 20 million again, but it's one that we really don't think the next two years are going to create the opportunities for that.

Forecasting new vs used car prices

CDG: I think the the juicy question here is we spoke about supply levels, but what happens to prices over the next 3 to 5 years, new versus used?
JS: Yeah. Through the pandemic, with the incredible run up in used vehicle prices that started first, and the reason for that is because the used market is actually the part of the market that is responsive to market conditions. And within the used market, it's the wholesale used market that actually is the best barometer for what supply and demand looks like. So, we had an incredible run up in used vehicle values that started in the second half of 2020, really reached its peak at the end of 2021. We gave some of that back last year and over the course of that time we basically had a scenario, especially at the end of 2021, that the used car price level was way out of alignment with the typical new vehicle price level. But since that time, the relationship between the two have come much closer to balance. I would say we were very close to being within the natural equilibrium, meaning the market normally corrects itself when you have periods of time that used vehicle values run up or new vehicle values run up, because the consumer, who is either challenged by affordability and has to switch to used now has an opportunity to go back into the new vehicle market, and that reduces demand for used and causes the prices to correct. So last year's decline in used retail, a decline of 10% by our metrics that happened was really part of the path of getting those two back in in relation with one another. We don't think that there's a big gap left that calls for a "price correction" or a further reduction in value. I think with the run up that we had in the first three months of the year, we had 12 weeks of wholesale prices going up to the year. We probably are on a path that over the next three months we're going to lose all of those gains while. But we are projecting by the end of the year, we're basically going to be back into a rhythm where depreciation is pretty normal, if not slightly below normal, simply because of the supply-constrained environment we're in. So, we think vehicle values are going to be returning to a much more predictable path that's driven by normal time, mileage, usage that delivers depreciation. But, if I put 12% as normal, we probably are going to see depreciation that's closer to 8% on average.
CDG: That's on used cars.
JS: Yeah, younger vehicles have actually appreciated more. And they're coming down a bit more because they're the ones that are especially impacted by suddenly more incentives being in the market on the new vehicle side, and rental car companies not being as aggressive as that buying, which is definitely been a factor that we've seen take place over the last couple of years.
CDG: Yeah, So pretty much, from here, you're anticipating that within the next couple of months we're going to give back all the gains from, say, Q1 or the first several months of the year. And from there, get back on a linear, would you say a linear decline, predictable decline in used car values?
JS: Yes, absolutely. By the end of the year, our current forecast says the Manheim Index is going to be up 2% year over year in December, which is pretty darn close to what a normal year over year path would be for the Manheim Index. And why is that? Manheim Index doesn't measure depreciation. It measures the mix of what dealers are paying for inventory, which naturally has inflation as part of it, because every month dealers are buying a younger mix of vehicles, and they bought less last month. So, over time, the Manheim Index usually delivers a 2% gain year over year, and we think we'll be close to that by the end of the year.

Advising a new car buyer

CDG: So, to keep this very simple, if you have to advise a family member on a car purchase right now. What would you tell them? New vs. used, now vs. wait, lease vs. buy? I know it's very general, and it depends on the car the program, but generally speaking, where's your head at?
JS: There's all kinds of questions to get at what is the optimal purchase point. I think the used vehicle market has far more opportunities to it than the new vehicle market in the short term.
CDG: I'm actually surprised to hear that, and I'm really curious to hear why.
JS: As long as you're not looking for a minivan, the most affordable sedans out there. If you're in the market for a luxury vehicle, you're going to see more buying opportunities.
CDG: In the used market.
JS: That's also true in the new market too, interestingly. What's most available in the new market and most incentivized is also delivering the biggest used vehicle price declines. So, you kind of have opportunities in both spaces. And if you're looking for a vehicle that doesn't fit that category, that's where you're kind of screwed or you need to wait.
CDG: You're saying that if I'm looking, let's just say, I'm going to use Jeep as an example, they're the talk of the town today. If Jeeps have all these incentives going for them on the new side, their later models will also be depreciating faster on the used side. So, you're likely to get a better deal on either side of the spectrum because the overall price is coming down.
JS: That's right. Then financing comes into the category. That's where it's much trickier, because if you're dependent upon credit in this market right now, you're much more likely to get a better monthly payment and a better total financing costs over time by buying the new vehicle, because you're more likely to find a 0% interest rate or something under 3% when the average new so far in May has crossed 9% for the first time in 20 years.
CDG: Insane. And I say insanity because the assets, the cars, have not come down. It would not be insanity if cars fell by $10,000 a piece, but it's insanity when their interest rates are this high and that this collateral hasn't moved. If anything, it's gone up.
JS: Yeah. It's going to depend on what segment you're looking to buy. Unfortunately for some segments, like the one you just transacted in, I think it's going to be one where it's going to take several years for it to be an environment where you can brag about the deal that you got.
CDG: Yeah. I mean, I got to tell you. I never thought I would have to use connections to buy a frickin minivan, like it was a weird experience. And the fact that I bought a new minivan for less than I would have paid used. That's another very weird phenomenon. But that's just the current state of the market and it's super competitive. It's crazy.
JS: Yeah.

Jonathan's take on EVs

CDG: Alright, so Elon Musk, friend of the pod. He's shouted us out a couple of times. Maybe he's listening right now. Hi, Elon, if you're listening. So, tell us your take on EVs. I know over the past couple of years there's been some [Cox Automotive] investments.
JS: Yeah, we have a mobility division that's very focused on electric vehicles. We bought a company two years ago called Spheres New Technology, which is a major player in Second Life, recycling. And we are diligently working on incorporating electric vehicle battery health into all of the valuation metrics that we do from Manheim MMR to Kelley Blue Book values. So, that is definitely a space, and we are seeing momentum. It's not just on the new side. We had our biggest quarter ever with electric vehicle sales at Manheim in the first quarter of this year. So while the used vehicle market is tight and very low, the shift which has taken years to really come to fruition, is finally taking place and it's becoming meaningful to more of dealers in the broader community and the retail market. So, we think this is only the beginning of what we're going to see in that space. A lot of what my team is going to be focused on is, the things that you've become accustomed to seeing us report on, think of us as having a parallel edition of the same details, covering the electrified space, and also covering how are we seeing EVs compare to ICE vehicles.
CDG: How are you seeing? Yeah, like from valuation depreciation curves. How are you seeing them compare?
JS: Generally, the first 12 weeks of this year saw almost all vehicles appreciate, and over time we've really seen electric vehicles start to perform better in terms of used vehicle value retention. The yardstick that is traditionally measured is what is the wholesale price relative to the MSRP–that's retention. In the vehicle world, and especially as Elon's vehicles have slowly become the norm in the industry, electric vehicle value retention is head and shoulders stronger today than it was five years ago.
CDG: Why is that? Why is the price retention stronger?
JS: There's multiple reasons for that. I would say the electric vehicles that were sold pre-Tesla were very heavy and everything wrong with what causes vehicles to not hold their value, meaning, they were heavily leased, they were heavily sold into fleets, and they were way overrepresented at Manheim. So their vehicle value retention was awful, flat out awful. So, at three years before the pandemic, a typical used vehicle would be worth about 50 to 60% of what its original sticker was. We had electric vehicles when I started in 2017 that were worth 10% of what their original sticker was. That does not help consumer confidence in the vehicle.
CDG: Or dealer confidence, frankly. I mean, no one wants to be stuck holding a hot potato, which that was the case partially at the beginning of this year. When Tesla began its price cuts, some dealers were like, fuck, my asset just felt like $10,000. It was scary.
JS: We are seeing a little bit of that. If Elon's listening, the consequences of cutting prices on the new side does have consequences.
CDG: I understand. I tweeted about this as well. I think short term, there's going to be volatility. I do think long term it's the right move. Truly, if your goal is to increase affordability and adoption, at some point, you're going to have to take the medicine and it's going to impact anyone else that has that vehicle on their balance sheet.
JS: We've definitely seen interest. We've got the strongest interest we've ever seen in electric vehicles, and that seems to be cascading into the used vehicle market.
CDG: Well, by what measure, though?
JS: By consumer, both stated on surveys, "Are you interested in buying?" or "Are you considering an electric vehicle in your next purchase?" We've gotten a majority in that choice. And then in what we observe on Kelley Blue Book. It's a great platform to see, what are consumers really looking at? What are they comparing as they're narrowing down their choices? Electric vehicles are definitely part of that. In fact, the interest is way larger than the reality. And that's where affordability, as you were pointing out, comes into play.
CDG: Would you say there is a geographic concentration in the coastal cities, or is it more evenly dispersed? Are we talking about New York, L.A., Texas, or are we talking about other states as well, the Midwest or wherever else?
JS: So there's no question that electric vehicle adoption has been first, a California thing, 100% West Coast thing vs. the rest of the country. Then, generally an urban phenomenon. Other areas, we are seeing interest grow across the board, but it's still a reality that you're most likely to see a consumer in an urban setting where they have access to chargers and a world where electric vehicles are. You're more likely to have a friend that's driving one be where we're really going to see more sales take place.

DJ Smoke's recommended listening

CDG: Dude, this was super insightful. I think people will love the insight. I think one thing worth mentioning here is our friend Jon Smoke is a man of many talents. He also DJs. I found that fascinating. I've followed your posts, your blogs, and where you put out soundtracks. And by the way, DJ Sol, David Solomon has some competition. DJs in the economics or finance sector.
JS: Yeah.
CDG: Give us some soundtracks to describe the current state of the economy. This should be fun.
JS: Well, every quarter I put together at least one playlist that I think captures the economy and the auto market themes. I went all hip hop for the first quarter and I still like top song selection from when I was in high school. It's tricky by Run-D.M.C. because, you know, when you ask me what are things going to look like, it's so tricky to forecast.
CDG: Nice.
JS: But, my Magnum Opus for playlists I put out right before last week's Fed meeting because I was hoping the Fed would actually listen and keep rates unchanged. I was hoping they would channel the Beatles and Let It Be.
CDG: Let it be. Don't raise it. Don't raise it.
JS: But instead, they were pushing higher and higher. So now, we find ourselves in a scenario of I don't know if we're going to necessarily see the Bad Moon Rising by CCR, but I'm actually really concerned that the next couple of months are going to be pretty telling in terms of pushing us in into a recession, especially when you add other risks like in the banking sector and what's happening with the debt ceiling that's likely to take place over the next couple of years. And at the end of the day, I'm worried about credit, and to me, the song out of the 24 songs that I put up that is most central to why I'm worried about the indirect consequences of what the Fed is doing, is Ain't No Sunshine, because there Ain't No Sunshine when credit is gone.
CDG: Great song.
JS: That's definitely old school, but you know, keep on me @SmokeonCars on Twitter and I'll publish every playlist that I do.
CDG: I got to admit, when we initially connected, I think your social media team commented on one of my posts and I DM'd them and blah, blah, blah, but I was – I'll admit, I came out guns blazing into the Twitterverse. I didn't really have like a plan. I was sort of like, you know, this social media stuff. There's no doubt about it. Like, the last 6 to 12 months, I really tightened up the game and kind of honed in on my niche. But I was like, this would be fun, and I hope it didn't bother [Jon], my inaccuracies early on before I posted the fine details, the data, I learned how this game works. So I'm just thrilled that we could do this. And like I said, it would be great to do this on a recurring basis. We can continue having industry update. Where can the audience learn more about you, about your work, and everything else?
JS: Well, you've got me on Twitter. It's @SmokeonCars. But really, my team and I publish something almost every day on the insights section of the Cox Automotive website, which is Just look for the market insights and outlook and you will find a Smoke on Cars section there. It's all of my stuff. But basically, all of the metrics and information my team is publishing, which I know you're a fan of.
CDG: Very, very much so. If you see me post tweets and I say, "Source: Cox Auto," you know where it comes from.
JS: Absolutely.
CDG: Jon Smoke, thanks so much. This was awesome. Wealth of Knowledge. I had a great time. Thanks.

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