#99 - What WIll Happen To Book Values with David Paris

Hey everybody. Another episode of the Independent Dealer podcast. Today we have David Paris with us from J.D.

Power.

NADA wholesale guidebooks, retail guidebooks, that's the book I use. And David really, really has some good information on how to stay current in this ever changing market because it is volatile. Thanks for being with us today, David.

Thanks for having me. It's my pleasure.

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson. Thank you so much for tuning. Let's do this.

All right, David, thank you so much for your time. We really appreciate you being here today on the podcast and helping educate independent dealers on what we can expect going forward. I know so many of us are concerned with what is this crazy, crazy time gonna do to book values? You're obviously very uniquely positioned to speak to this at J.D. power. And the NADA book stuff. Tell us a little bit, just generally speaking, what are you guys doing or where do you see this taking kind of book values?

Can we, I'm sorry to jump in, Jeff. David, can we compare and contrast what, let's say 45 days ago, how the books were getting their values mostly compared to what's going on right this second? I think maybe that will be a little better way to look at it.

Yeah, absolutely. So historically we derive our book values from, from wholesale market transactions. We have a database and collect millions of transactions going back in time. And historically we had based our values primarily off of those. But since the auction right now, it's quite frankly broken. We've adapted and we're taking a more prudent approach to our values. We're not necessarily going to be, you know, portraying exactly what we're auction place, but what the values should be in a correct market. So we're looking at other things now. Being part of J.D. power, we have access to used retail transaction prices, also a ton of asking, asking price information. So we're taking a little bit different approach, trying to put out values as they should be in a functioning environment, not necessarily just showing what's happening in the wholesale market because, you know, wholesale prices currently through last week are down an average of around 14%. And that's just not simply what we're seeing on the retail side of the market. Retail prices have actually held pretty soft and the dealers that still are able to retail these used vehicles are still doing pretty well. So we're trying to have a more balanced approach to our value.

David, correct me if I'm wrong, but I always thought that nada book values were based on nada partners Retail of those units, Is that not the case? And I guess their retail value and the loan that was made on that vehicle, is that not the case?

That is not necessarily the case. We use all of NAA's auction price to primarily come up with the algorithms for each of our individual values, whether it be, you know, clean retail, clean loan, whatever it might be. So everything is primarily based off of that. Those auction transactions.

Okay, I must have maybe years and years ago that's the way it was. But it's funny that you say that what the model has seen is that the retail prices are holding pretty strong. And that makes sense to me because maybe the retail price prices haven't caught up. But what I have seen is that you're able to buy the wholesale unit where you should have been buying the wholesale unit to make the margins that are expected to be made. Do you see that?

I mean, wholesale prices, there's no doubt about it that they are severely depressed right now. A lot of that has to do with just the physical auctions being closed. I think you have a situation where, for example, through the week of ending April 5th, we only recorded just under 15,000 total auction transactions. Whereas you know, typically during this period, 115,000 units. So I think you're seeing a situation where that are taking to the wholesale marketplaces are sellers that really need to get rid of them. And then you also have some of these dealers sitting on the sidelines snatching up these great deals. Because to your point, there is certainly a very large spread between what those are going for currently and then what they're being retailed for.

Yeah, absolutely. I think those dealers with cash are trying to find motivated sellers. And I think really when people start getting scared that this fire sale that some sellers might be doing, you know, maybe the big lease companies, we could.

Talk more about that.

Who these people are that are actually cutting cars loose right now. But it's when you guys take the steps to keep it from being an implosion. You know, back in 2008, they were foreclosing on people's properties, then fire selling them just to get 50 cents on the dollar and that in turn collapses all the surrounding properties value. So when you guys can be responsible and say, hey, we're not going to follow this trend down a hole, we're not going to let these used car wholesale prices collapse on each other because we're going to start reporting these numbers and obviously the other book people need to get on board. And that's probably another rabbit hole to go down. But that's going to help it from just collapsing on itself. Who do you see or what market segments do you see being hurt the most through this? I mean everyone talks about kind of the high end luxury cars are the ones that are taking the largest hit and the lower ones are staying pretty firm. Or do you see any correlation in price point?

Well, actually, typically if you think about what this time of the year normally looks like, you're seeing a lot of consumers out there that have just been armed with, you know, pretty nice down payments via tax refunds. And this is usually the time of the year where we see the strongest used prices, the strongest demand for used vehicles as well. And usually it's the more affordable segments that their prices are the strongest during these points. In times where, you know, consumers and people that have received these tax refunds and are using them as down payments, they're a little bit more sensitive to large, large purchases. So it makes sense where you see the, the more affordable segments, you know, something like mid sized or the smaller compact cars, those prices usually strong. And that's what we're seeing right now. We're actually seeing that, you know, these mainstream passenger car prices are the softest right now.

David, you can answer this question if you want and you may not have any knowledge of this, but over the last I guess month at the auction, what I've seen is that your big, big conglomerates, CarMax, Carvana drive time, they are not buying cars. Can you speak to what happens when these big segments of the market quit buying? And I think maybe that's causing a depression in price. Is that something y' all see or can you speak to that?

Well, yeah, they're definitely not buying cars. And they're not only not buying cars at the auction, but I know that Carvana and Broome right now if you go on and you're somebody trying to sell a car and you get your offer, they will not your car buy a car from them. So they've changed their business model at least here in the and I mean, you know, more competition in the wholesale marketplace, it just drives prices up. So if you have, you know, certain players that usually go in and you know, you've always been, aren't buying vehicles, you've just removed a layer. So you're going to see depressed prices through that in and of itself.

So do you know of any other large, I guess dealer congruent conglomerates that have, have backed off to that effect as well? Just not the, those big ones.

I have not personally talked to any of the big ones that have indicated that they've, you know, pulled out but just through volumes, you can see it's, it's just not there anymore. So. And with the transactions, I can't actually see who's been purchasing the vehicles either. We just see that the sell.

Okay, and do you see a correlation from the flip side of that? I mean again, maybe not something you can speak to, but do are there certain sellers, you know that Hertz or Avis or some of these guys that are motivated to because they do need to turn those cars back into cash, even at a 10%, you know, reduction.

I can't speak for them, you know, entirely, but I definitely think that you are seeing a little bit of that happening. But from what I understand, especially enterprise and Hertz and some of the bigger ones, they're pretty well positioned right now and they're, they're trying to hold on as much as they can to figure out what's going on. Yeah, nobody's making any knee jerk reactions right now.

So I think that's a, that's key. I heard some people and I don't think they knew what they were talking about but how some of these enterprise and herds for dumping cars, but I have not seen that to be the case. So that, that definitely hadn't. I don't think it's affected the wholesale market like, like some people claim that has. That being said, do you think, and you may not know this answer, do you think that these big rental car companies will hold off buying new inventory because of this and maybe hold their rental units maybe up to 60 or 70,000 miles like we saw back in 08?

I mean it's entirely possible, you know, for use history indicators happen if the worse. I think a little too, you know, try to make an educated guess on what they're going to be doing. It seems like things are starting to trend more positively as far as getting the country back up and running, at least in certain sections. So I think that's a pretty positive indicator.

So to transition a little bit. David, in your opinion, do you feel like the other. I mean, because obviously in my region, you know, the J.D. power Nada book is pretty strong as far as what the lenders like to see and what we base our prices off. And I know some are regional and I'm not super educated on all that, but do you think that as a dealer group there needs to be a call to the book companies to take smarter approaches to valuation? Kind of like what you guys are doing? Do you think everyone else is following that model to say, hey, we're not going to let this collapse, or hey, no, we're going to let a free market be a free market. And if these prices go down for six months and then skyrocket back up, you know.

Yeah, that's a tough one for the other books. But I think our approach is, you know, one of the more out there right now. So I definitely encourage listeners to, you know, check out what we're doing and follow our methodology because I think ultimately it'll help you be successful, you know, once things start to turn around. So.

Yeah, I mean, it's absolutely smart what you guys are doing. Makes a lot of sense to not to recognize this is what it is, you know, and a lot of dealers and people want to, want to kind of speculate on, well, more supply means, you know, less demand, which means prices, wholesale prices are going to drop in six months because there's going to be so many cars on the market. But what they don't always factor in is there are policy changes. So when you guys decide to do this and be a little more smarter on what the realistic value of a car is and Manheim Cox decides to follow, you know, and I don't want to say prop up, but maybe, you know, change their algorithm on how they value these cars, it's gonna, it's gonna both, you know, it's gonna not cause kind of a collapse of those prices.

Yeah, yeah, absolutely. And I mean, you know, if, if we start to see, you know, the wholesale markets come back and volumes going through and, you know, prices still be as depressed as they are, we, we were are certainly going to re examine our approach and we're not going to artificially, you know, prop up values. If, if, you know, the market's actually dictating that a functioning market, that is what, what the wholesale market is right now, it's, it's just broken. So we can't, we can't portray that in our, in our book value.

That's, that's something. Yeah, that's something I want to talk about real quick about the, the wholesale market being broken at the auctions. How much do you think it hurts when the auctions aren't actually open, but you still have condition reports? Do you think that, let's say we were on a fully functioning market and auctions decided to go only digital? They may at some point decide to do this or not. What do you think that does to the market compared to what it is currently or what it was?

Well, I think if you Know, they decided to go fully digital, but volumes were there. It was still a healthy environment. You know, dealers that hadn't purchased digital in the past were up to speed and understand, you know, what that means and how it's different. They've done things in the past. I don't see any problem with, you know, any kind of values or volume changes as long as everybody's on board, functioning market and everybody's on the same page.

So what do you think? I mean, you know, it's interesting. I mean, how many, how long have we been doing digital auctions now? I would think It'd be maybe 15 years or pretty close. Coming up on 15 years, how long is it going to take? That long? How long is it going to take a dealer to accept that process? It seems like I see more and more dealers say I'll never buy a car without touching it. And I buy cars all day long without touching them. Can you speak to that? You know, that process and why more dealers hadn't observed it or accepted it?

Well, you know, I think 15 years ago the technology certainly wasn't there. But now when you think about if you're, you know, buying something digitally online, you can have detailed, high resolution pictures, you can have 360 degree camera views, you can even, you know, here and running, it's just a really different time. So I think that, you know, now more so than ever, if you're not doing it, you certainly need to be doing it because of, you know, situations like we're in now. It could, you know, potentially put you out of business if you, if you don't hop on board and at least have the capability to do it. The biggest thing, being able to do it if you need to, you don't want to, you know, have to shut down shop completely because you're, you're, you're not up to speed with all the latest stuff.

So, so the big hang up I see, and Luke, to address your point, from my standpoint is if I'm going to go out and buy a 60,000 mile Ford Focus, let's say, I don't know, let's just hypothetically say MMR is ten grand and unfortunately the book or my loan value is only 12, you know, MMR and my NADA loan value are only $2,000 away. After I pay fees, transport and oil change, I got no room to recondition that car. My front end gross is completely gone. So that's my hang up or at least the rub I feel is the problem when auction value, you Know what is mmr, let's say if that's what you're buying off of or wholesale is so darn close to loan value. I've got no gross.

Well, that's. You don't.

I can't afford to recon anything. I got to see it and know exactly the dollar I got to put into that darn thing. I can't have it show up and there be a surpr in the rear end because there's just no margin left.

Yeah, but that's the reason you don't buy that car. You know, you need to look at the cars that the nada retail value is gives you significant space in there. And there's a lot of cars, I.

Argue there's less and less cars like that because of front end compression. Because dealers are willing to take $500 gross on the front end of all this Velocity Motors nonsense.

Well, let's talk, let's ask David that question. David. And you've seen the run up to this. I mean in the last five to five to eight years when you're seeing the V auto model come into play and everybody's killing. They've essentially killed front end gross and worried about back end profit. Can you talk about what the books have seen with this and how it's affecting retail values and the race at the bottom? Can you talk to any of that?

Yeah, I mean there's certainly been a ton of compression there. You can see it on especially the new side of the market. I mean new growth is like hardly anything at this point. You know, everybody's making money on, on F and I. Same thing with used. Used growth is a little bit better, but I mean those margins are compressing with, with each and every year. So that's, that's certainly something that we have seen happening. And I don't, I don't think anything out there is going to change that. You know, it's just the way is turning. So it's something to be aware of.

But couldn't something like this affect that? Because if you've got dealers who were essentially making nothing on the front end and they were depending on volume, volume, volume, and all of a sudden they get hit for a couple months where their volume is a third of what it is. I mean those people aren't going to make it, I would assume.

Right.

Hey everybody. Jeff here. Sorry to interrupt the interview, but I wanted to make sure everyone knew about the new and improved the independentdealer.com website. It is the place to find out what is going on with the podcast, check out all of our episodes on itunes, our social links. You can also give us your email and we will add you to our mailing list. So you are the first one to know about what is coming up new and exciting here at the podcast. Also, check out our video library. You can also ask us questions, find out more about myself and Luke, and see our calendar of events, places we'll be speaking, where you can catch up with us and meet us in person. So. Theindependentdealer.com and now back to the interview.

Yeah, I think you're absolutely right.

Yeah, but so whose responsibility is that? I guess that's what I would look at. I'd say is now, is it us, is it the dealers that are selling the V auto philosophy that are low gross, you know, quick turn type dealers that are killing book values? Or is it the book company's responsibility to say, hey, you know, we know these guys, this street data is wrong because they're not making any money. And if we continue to follow this path from a book valuation standpoint, we're going to be the ones helping to crush the used car industry, you know, and put our own, I mean, put our own consumers out of business. I don't know. I mean, I don't, I don't think it's your guys whose responsibility is it? Are we the ones leading us down this hole or is it the book companies and the, you know.

Well, the book companies can only go after the book values there, Jeff. That. I don't think it's their fault. What do you say, David?

Yeah, I mean, you know, we're only portraying what's happening in the place. We're, you know, an independent source and we just try to reflect exactly what's going on. Hmm.

That's, that's.

So it's our fault.

It is our fault.

So even if auction values completely dropped for a 12 month period, all these guys were buying the same cars two or three grand cheaper than they were six months ago. These yahoos are still gonna bring these cars home and mark them up 500 bucks, which will be way below retail value. And they'll try to V auto the guy down the street because they want to be the best price within 500 miles.

But you're missing something that that's not going to happen here because there's going to be so much, so much attrition in the dealer side that, that it'll allow the price, the price to go up on the retail side.

You're assuming that it's going to put some of those V auto dealers out of business, that's what you're saying.

Yeah, there's no way around that. So the reason, I don't know the reason the race to the bottom is there is because there are so many people selling the same car.

So right.

If you cut out, let's say a third of those dealers, which very possibly will happen and people start to realize there's front end gross again, I think it's going to change the market. David, you see anything there?

Yeah.

And you know, also, also to that point we've seen the last several years you supply coming back to the market and it's its highest levels ever. This year is going to be kind of even with last year, which is kind of the peak. And then you got to think automakers have not been producing cars here and it's going to take them a while to get up to speed again too. So you know, looking out next year and then the subsequent years, you're going to have even less used supply coming back to the market. So there's not going to be all these people selling the same vehicles because they're going to be even less of them out there. So I think that might ease it a little bit as well.

Yeah, that's interesting. And Jeff, you may not remember this but and I'm not sure how long you don't really buy that many cars. But in 12, 11 and 12, if you look at the amount of cars used car market for 11 and 12 models, it's almost non existent. When you talk about Tahoe Suburbans and things like this, they quit making them almost. David, what do you see right now with automakers when it comes to making cars? You mentioned it just then, but do you have any real numbers of what production may end up this year? Have they put that out?

They have not yet. That's something that we're still working very closely with automakers to try to understand how that's going to look. But I mean it's certainly going to have a pretty big effect because you figure they haven't been building cars now for a month. Parts suppliers too haven't been producing the parts. And then we're coming up pretty soon on a model year transition too. So from, you know, a government regulatory side, sometimes you can't use the same parts produced this year, next year. So what is all of that going to mean? When is production actually going to get back up to being, you know, whole again? I guess we don't have the answer necessarily right now, but it's something that we're, we're looking into and monitoring very closely.

What was the production numbers final last year? Do you know? Those on the 19 models?

I don't have the number in front of me. Okay.

Jeff, what you got?

No, I was just saying I don't know what that number is either. But that, that would be my counter argument to your conversation, Luke, is it only matters if this is a blip. If it's a one or two month blip, the manufacturers will catch up. The 2022 S might be a little bit late coming out, something like that. They'll catch up with the production if the demand's there. Now if this extends and it's a full on recession and people are scared like 2008, then yeah, that trickles down to the couple. People aren't buying new, they're buying used, which means there's less off lease, which means there's less trade ins in a year or two or three from now. And that's where, that's where the grossest can be held. Because I can't go replace this 2 year old Nissan Altima at the auction tomorrow because they're running 50 of them. You know, right now. I can v auto the crap out of these things because I know I can go pick up five more next Friday, you know.

Sure.

But when that wasn't the case back in 2013. 14. Yeah, you were holding your grosses because it was much harder. I remember that. I didn't want to cheap sell the car because I know I couldn't replace it.

You know, that's exactly right.

Right now I can. I mean, I would sell my entire lot at a 500 to $700 markup today. Today. Because I know I can pick up the majority of these cars at the auction tomorrow for a grand or $500 less than what I'm into these, you know, so there's that VI auto model that we run into.

I've seen a lot of no sales at auction, so I'm not sure.

Well, no sale because you're trying to steal it, not because you're trying to offer them close to book value. They're only no sailing stuff because you're trying to get a two grand back mmr, Right. Those are the no sales I'm seeing when I offer the real money. These guys are cutting them loose.

Well, but I don't think, I don't think MMR is the real money right now, honestly.

But it is.

I don't think so. I think it, I think it's a 1015 back of MMR.

But that's exactly what David's saying is we're trying not to chase the real money down this rabbit hole.

Right.

We're trying to stay. Hey, MMR is not following this. Depressed volume, depressed price. MMR is not going to drop because of the low volume, just like Nada is not going to drop their valuations because of this anomaly. So you might think it's not the real money today, but it is. If that's what they're going to cut it loose for. It's absolutely real. Real is what you can buy it for.

So, David, I guess to wrap up our conversation here, let's look at.

I will continue to argue about this when you're done. Tie up your time.

Okay, so I guess give us some really good advice on what dealers can do when we're looking at the books right now, how to weather this storm that we, that we're in. What's some good advice to stay strong and book wise so that we can, you know, make the best decisions with our inventory.

Yeah, book wise. I mean, you know, obviously I'm going to pitch our book because of the steps that we're taking to ensure that we're actually reflecting what these vehicles are worth in the marketplace. You know, so just you can keep up to date with everything that we're doing. If you go to our website, nada.comb2b we give a pretty good explanation of exactly what we're doing with book value. We're updating with weekly values as well. So we're not just, you know, running a month on end like we have in the past. We're given weekly updates to try to give a better, accurate, more up to date picture of what's going on. And then, you know, just a little piece of advice for the independent dealers right now, I think, you know, just from what I've seen, try to retail as much of your inventory as possible. I wouldn't, you know, be taking a whole lot of stuff to the wholesale market unless you absolutely have to until that mark market's back up running, as it should be.

Man, that's great advice. Yes. If you don't need to wholesale, if you don't need cash right now, do not take the bath. Try to retail that thing because it's gonna, you're gonna take a bath if you try.

But even if you do need a. Yeah, wholesale it off your lot. Yeah, take it two grand back. A book like Luke wants to buy it and sell it to a retail customer.

Yes, that's right. Retail wholesale, if you have to.

Retail wholesale, yeah. David, thank you so much for your time, man. What a huge education for me.

Yeah, for sure.

Really appreciate it.

No, thank you, guys.

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