No, this crazy price offered by Carvana for your car is not too good to be true

An eight-year-old Tacoma that sells for above its original price. An instant cash offer of thousands of dollars above the lease buy-back price of a Mazda 3. A used consumer car purchased three years ago is now worth more than it was bought for. It’s not fluke, it’s not just Carvana or Vroom, and it’s not going to go away anytime soon. This is what the used car market looks like in 2021.

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The weirdness is more visible on social media, where it’s easy to find reports from online-only retailers like Carvana and Vroom offering stratospheric buy-back prices for everyday used cars. Often times, the prices of very hot used vehicles, like the Jeep Wrangler and Toyota Tacoma, approach or exceed the suggested retail price for their newer counterparts. Obviously, one could naturally assume that someone is losing money here. “Disrupting” the market by burning investor money is a classic Silicon Valley game that has defined the rise of Uber. It wouldn’t be surprising to see online retailers use COVID-19-related market shifts and heaps of venture capital money to gobble up market share while suffering substantial losses.

Yet that is not what is happening. It may defy surface logic and stun onlookers, but trade-in values ​​and used car prices at online retailers are not outliers.

“The market is absolutely on fire,” said Jonathan Banks, vice president and general manager of vehicle valuation at JD Power. Road & Track. “The dealers might pay you even more, depending on where you are. Especially if you have a Tacoma. My God, if you’ve got a Tacoma, it’s like a gold mine. Your Tacoma, your Wrangler, your F-150, the dealers are also going to pay you the highest price. So it’s not a Carvana phenomenon.

The real reason places like Vroom, Carvana, and CarMax are getting attention is that their used car deals are quick and accessible. A dealership may be willing to pay you more than your buyback price for a leased vehicle, but few take the time to stop for a trade-in appraisal. Turning the process into a 2-minute web page that potential sellers can populate on a whim gives people a quick and easy overview of the car’s value. And with stocks so scarce, companies are happy to spend a lot to keep their selections varied. Plus, big numbers get people talking.

“[Companies like Vroom and Carvana] have offered mostly crazy money on these vehicles, and word of mouth marketing is strong; when it comes to automotive, getting a recommendation from someone you know is stronger than reading an online review of the exact same product, ”said Ivan Drury, senior director of insights at Edmunds. Road & Track. “And basically they’re buying the inventory they need to do business. They need these cars anyway, but by paying extra they get good feelings and vibes all around. And on the other hand, when they sell the cars, they charge a premium. “

Drury himself received an offer from Carvana that was in excess of what a dealer would pay. He agreed, found it very easy to return the car to the company, and then saw the company sell the vehicle for $ 5,000 more than they paid him. Road & Track Editor-in-chief Travis Okulski had a similar experience, selling his Mazda3 for more than its buyout price and seeing it transact weeks later for thousands more. These deals only exist because there are consumers on the other end of the line willing to pay even more for that same used car.

This is partly because at the moment it is difficult to get a new car. Like most industries, the automotive industry relies heavily on forecasts made on the basis of previous years. When COVID-19 shut down the world, the playbook came out the window. Fearing the economic downturn could slow car sales for months on end, automakers cut supplier deals and tightened their belts in the spring of 2020 in anticipation of a sharp collapse in sales.

Richard Baker / Getty Images

But two months later, consumers were emerging from the shelter-in-place state with renewed interest in private transportation. Sales rebounded quickly; the suppliers did not. In the age of just-in-time manufacturing, setting up factories is a process of several months. Raw materials and simple parts were relatively easy to get online. It was the specialized components that slowed things down. Computer chips, which require very specific installations with limited flexibility, are still not being produced to their pre-pandemic capacity. The companies making them have been successful in winning over buyers in the mainstream tech industries that were booming even amid the lockdown; automakers, while desperate to reinstate their contracts, have been sacked to the back of the line. On top of all that, a fire at one of the world’s largest auto chip factories took key capabilities offline.

As factories tried to unravel the supply chain, they also had to catch up with two months without any production. Early COVID-19 closures shut down all major factories. Production restarted, but not before consumers had already reached dealerships. Dealers who typically stocked model inventory for two months barely had enough inventory to last a week.

Ford began to resume production and operations in the United States today, the company has implemented robust safety and care measures globally to help support a safe and healthy environment for workers business, including health assessment measures, personal protective equipment, and facility modifications to increase social distancing

Charlotte Smith / Ford Motor Co.

Meanwhile, the restrictions on coronaviruses have had dramatically stratified effects on consumers. Low-wage, in-person workers suffered record unemployment. Elsewhere, workers able to work from home were financially protected but had no outlet for discretionary spending. With no lush vacations and nightlife, they had more money than ever for cars. Sales have exploded, especially of the more expensive models. Trucks, SUVs and high-end cars have become nowhere to be found on the lots.

It’s no surprise that new car inventories have dried up. Every part of manufacturing is built around precise forecasts of demand. Like just about everyone, automakers had no idea how to plan for 2020. What was supposed to be a Great Recession meltdown turned into an all-out race on dealerships, resulting in record supply and sales. record profits for dealers. Resellers, overwhelmed by demand, began to sell popular models for more than the sticker. Price-conscious consumers turned to the second-hand market and found that even there the supply was limited. The car rental companies, long known as the bottomless buckets of the latest generation used cars, had reduced all their orders as trips stopped, forcing them to hold onto cars long after they had finished. would normally have sold them to new owners. Of course, the prices would go up. But all of that demand was poured into an already overflowing mug.

“The used market was healthier than it ever was before the pandemic,” Banks said, noting that improved reliability has long improved demand for used vehicles. “The pandemic has only accelerated demand. “

This distinction is vital. This is an increase in demand, but it does not make it a bubble. The banks point out that this is not motivated by speculators or scalpers trying to make a quick buck. It is motivated by real demand. And, according to JD Power, don’t expect this record-breaking demand to dry up anytime soon. Inventories are still low, the recovery is in full swing, used cars are better than ever, and the microchip shortage will cut new car production for the foreseeable future. Prices, the firm predicts, will remain high for at least a year.

So if you’re tempted by a catchy exchange number, don’t write it down as too good to be true. With a few legwork, you may be able to get even more for your car. The only question is, with prices rising across all segments, what the heck can you afford to replace it with? These days, your dollar might not go as far as you think.

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