Like a lot of the companies that have gone bankrupt during the coronavirus crisis, rental-car giant Hertz had preexisting conditions. The company had gone through four CEOs since 2014, made questionable decisions about which cars to buy, and taken on too much debt. The interaction of a collapse in rental-car demand and a fragile debt structure is what finally did the company in. Hertz financed itself mostly by taking out loans secured by its fleet of cars, and if the cars fell in value, Hertz’s lenders had the right to demand an immediate payment reducing the amount of the loan, so it was still comfortably covered by the cars’ now-lower value. Because of the crisis, used-car values and sales volumes fell right as Hertz lost most of its customers, and Hertz had no good way to come up with the payment its lenders were entitled to. Thus, Hertz filed for bankruptcy.
The bankruptcy filing has started a 60-day clock, during which Hertz’s secured lenders must wait before they can foreclose on the 400,000 U.S. cars that were financed through such arrangements. It is possible that during the 60 days, Hertz and its creditors will work out a deal that forestalls that foreclosure. Hertz has unsecured lenders who depend on Hertz’s future revenues to be repaid, and who will be screwed if the secured lenders liquidate so much of the company’s vehicle fleet, so there will be a complex negotiation. But such a deal is still likely to involve the liquidation of a substantial portion of those 400,000 vehicles, as Hertz prepares to continue doing business amid an extended decline in leisure travel and a possibly permanent reduction in business travel. So, however the Hertz bankruptcy works out, you can expect a lot of extra Ford Focuses and Chevrolet Malibus on used-car lots over the next year.
That should mean used cars will be cheap to buy, right? Well, that depends. The disruption at Hertz — and the broader disruption in rental-car demand, which may cause Hertz’s non-bankrupt competitors to shrink their own fleets — is just one of many unusual things happening in car-related businesses right now. And some of the other things that are happening could tend to push new- and used-car prices up.
Most important, auto-manufacturing plants throughout North America were closed for much of March and all of April, and many of them remain closed today. There are ongoing risks to production as the year continues: Resurgent outbreaks could force reclosure of auto plants, and even plants that face no barriers to operation themselves may be disrupted by the lack of available parts due to production difficulties in other countries, including Canada and Mexico. So, while the troubles at Hertz could make hundreds of thousands used cars and light trucks prematurely available for retail sale in the U.S., auto-manufacturing disruptions are likely to reduce the number of new vehicles available for sale in the U.S. this year by millions.
“If we don’t have new cars to sell, it boosts used-car values,” said Anthony Pordon, an executive at Penske Automotive Group, at a Center for Automotive Research presentation earlier this month. (Penske owns dealerships that sell new and used cars.) Pordon noted that young used cars, under four years old, are especially close substitutes for new cars, because they typically represent an improvement in technology compared to the older car a customer may be trading in. In general, vehicles sold off from rental-car fleets will be in this age bracket. Reduced fleet sales of new cars and light trucks — whether to rental-car firms that are shrinking, or to governments that are cutting budgets — may also help make more new vehicles available to retail consumers, helping to offset the supply crunch from factory closures. Ordinarily, fleet sales make up nearly 20 percent of total new light-vehicle sales in the U.S.
The other big question is how consumer demand for cars will be affected by the crisis. In March and April, sales of new and used cars fell sharply as consumers stayed home and some states ordered car dealerships to close at least their sales departments, but sales volumes have already begun to rebound sharply. Cox Automotive, an industry-research firm, estimates that sales volume in the first 20 days of May was down 32 percent for new vehicles and 6 percent for used vehicles compared to the same period a year earlier. In April, those declines had been 47 percent and 34 percent, respectively. And as customers have returned to buying cars, the value pressure on used cars appears to have abated somewhat. Manheim, which runs wholesale auctions where dealers get used cars and trucks to sell, says wholesale prices for used vehicles fell sharply in April, but bounced back in the first half of May, and are now down only 5 percent from a year ago.
It’s not hard to think of ways the coronavirus crisis could boost demand for autos. You hear anecdotal stories about people who have decided they need a car (or an additional car) for their households because the epidemic has made them reluctant to use ride-sharing services or public transportation. (“A lot of our members say they will take as many sub-$10,000 vehicles as they can get,” said Patrick Manzi, the chief economist for the National Association of Auto Dealers, at that Center for Automotive Research event, referencing the demand from households that have decided they need an extra car.) Stimulus checks and enhanced unemployment benefits have softened the blow of the economic crisis and even left some households more cash rich than they were before. And the effective unavailability of certain categories of consumption — for instance, restaurants, vacations, and live entertainment — could encourage more spending on what is available, like vehicles.
On the other hand, there are obvious reasons demand for cars would fall. Foremost, tens of millions of people have been put out of work by the crisis, and unemployment is usually not a great time to make a major capital purchase. Even people who remain employed have been driving a lot less over the last few months, and many workers are likely to continue working from home for the rest of the year. People who aren’t using their cars so much might not feel any urgency to buy something newer. And the longer that severe disruptions to the economy persist, the more damage there should be to consumer demand overall, especially if the federal government’s commitment to fiscal stimulus wanes.
In this environment of severe uncertainty, it’s striking how stable the retail prices consumers are paying for vehicles have remained. Inflation data that showed sharp drops in prices for gasoline and airfares in April showed new-car prices unchanged and used-car prices down less than one percent. Those figures may be obscuring a modest drop in effective prices for new vehicles: Auto manufacturers have been incentivizing purchases by offering zero-interest financing to buyers with good credit, and the implicit discount from the zero-interest financing does not show up in the auto price as tracked by the Bureau of Labor Statistics. In any case, what consumers are finding are attractive terms to buy cars, not fire-sale terms. Whether this remains a good time to buy a car will depend on whether supply-creating events like the Hertz bankruptcy are more than offset by supply-reducing events like auto plant closures, and on how many households feel good enough about their finances to go out and buy a car.