CarMax: Another 'Recession-Proof' Myth Busted

Myth: "The used car market is recession-proof, because when times are hard, people buy used cars."

CarMax, the large used car chain which reported a steep drop in earnings last quarter, now says that the price of used SUVs and trucks is falling sharply.  Although it was not in the news story, the drop in SUV and truck prices is probably not fully compensated by rising values of fuel-efficient cars.  So the value of the CarMax inventory is dropping.

Let's talk about that myth.  I'll grant that someone affected by recession who absolutely needs a car is more likely to buy used than new.  However, most folks already have a car.  When they have lost their jobs, or are very worried about losing their jobs, they don't buy used instead of new; they buy nothing at all!

My research into the most cyclical industries showed used car sales as extremely vulnerable to recessions, despite the common myth.

Comments

[chris vale]

You've missed the point entirely. The decline in price of Carmax's inventory is due to rising fuel cost. It has nothing to do with recession.

[Artie]

Actually the rising fuel cost is motivating buyers that have SUVs to buy more economic cars as well as folks that need SUVs can get them a the lowest prices ever!!! Think about it and do the math. Consumers will always buy cars!!!!

[mariposa]

Agree with article. Not sure where I see more SUV's -- in the grocery parking lot or in the used car lot. Now that would be a very interesting ratio to track.
And I wonder about boats and camping trailers big as a bus.

Those with enough $ to consider any new vehicle, would get more fuel efficient. Those strapped for cash or credit, would get nothing. I wonder if tightened credit is keeping some people from buying.
No job? Doesn't matter, we sell you car for nothing down anyway!

Do they bundle car loans?

[solohedger]

Great insight Bill. It would have been even more great BEFORE the disappointing announcement.

[jammer]

Actually, it is a combination of the mentioned factors.

People are trading in their SUVs for smaller vehicles. (buying cars)

People are keeping their SUVs that now have a drastically reduced value. (keeping cars)

People are not buying cars because they may have lost their job or had a decrease in pay. (keeping cars)

People who need or want a car are buying cars. (buying cars)

People are losing their cars because their house payment went up and they can't afford both payments. These people need a really cheap junker that they can't get at CarMax. Maybe these will be potential future customers. (losing cars)

The net effect is reflected in CarMax's stock prices. (people aren't buying as many cars as they usually do)

[Ames Tiedeman]

Whoever thought CarMax was rescession proof must also believe in the Tooth Fairy!