Used-vehicle prices have been on a wild ride lately, but will dropping prices be a positive sign for the economy?
The answer is “barely yes,” according to William Strauss, senior economist and advisor for the Federal Reserve Bank of Chicago.
“In fact, I would get nervous if we started to see more severe discounting,” Strauss said during a panel at the 2017 Auto Finance Risk & Compliance Summit last month.
From 1999 through 2007, auto lenders were operating a financial model that kept “pushing volume” while “losing money on every single scale,” Strauss said. The drive of short-term profit inevitably led to the financial crisis in 2008.
“They [car manufacturers] needed to sell because they would lose more if they shut the production facility down, so it was the opposite of maximizing profit,” he added. “It was minimizing losses … the flip side of the same coin.”
Many used-vehicles are coming off lease this year, which will inevitably drive down prices for used-vehicles, Strauss said. However, will “nearly new products” coming off lease compete against “new products?” he asked. And, will “nearly new products” keep new product prices from being too high? “I think we will see some real challenges here,” he said.
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