13 ms·

This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities and no ability

This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities and no ability to refinance in a rising interest rate market. The real question for normal people is if Carvana sells off a huge chunk of its inventory at fire-sale prices, does that accelerate the crash in used car prices? Is March of 2023 the right time to pick up that fun sports car since it'll be super affordable?

shaburn 4y ago
Yes.
celestialcheese 4y ago
Probably more like July. It's going to take a long time for these loans to get liquidated, and then processed through the repo markets. And likely the lenders will hold the repo'd asset longer if they can to not create a glut of vehicles. The way this really get's great for buying repo'd sports cars is if we get forced liquidations from the lenders. It's going to be a bloodbath.
- nfriedly 4y ago
  According to some video I saw on YouTube, there's already a large number of repossessed vehicles that banks are being very slow to release to the market, because they want to keep the prices high.
  - davewritescode 4y ago
    That's something that works when repossessions are still relatively low. Right now, most people are still employed and car payments are pretty high on the list of must pay bills, right behind mortgages. It's the same thing hedge funds do when taking or exiting a big position, move slowly to avoid spooking the market. If someone like Carvana has to liquidate cars at a loss to keep the lights on, you're going to see a FLOOD of cars hit the market as you'll have a rapidly depreciating asset and nobody will want to hold.
xnx 4y ago
Any reason those cars wouldn't sell at the going (probably high) used car rate at the time? e.g. https://publish.manheim.com/content/dam/consulting/ManheimUsedVehicleValueIndex-LineGraph.png https://publish.manheim.com/content/dam/consulting/ManheimUs...
twblalock 4y ago
If that was the case, why isn't the same thing happening to Carmax and Vroom and the other Carvana-style used-car dealers? Used car prices are falling and I assume it would hurt all of them, but it seems to be hurting Carvana more than the others.
- avgDev 4y ago
  Not sure about Vroom, but carmax actually performs proper car inspections before purchase. They are not moving fast and breaking things.
  - reaperducer 4y ago
    Not sure about Vroom, but carmax actually performs proper car inspections before purchase. Those CarMax inspections are so valuable that vultures patrol the parking lot, and if you leave without selling your car, they'll follow you home and make an offer on your car. It happened to me. CarMax said the car was worth $8,500. I wanted to bring in my other car for an evaluation to decide which one to sell. A guy followed me to the grocery store across the street, approached me in the parking lot and started his pitch with, "I'll give you a thousand dollars more than whatever CarMax offered you." I asked him if he wanted to look under the hood and take it for a test drive or anything, and he said he didn't need to, because CarMax had already done the hard work for him. (My life situation changed shortly thereafter and I didn't end up selling either car.)
    - SilasX 4y ago
      Haha. In Austin I hear radio ads from a chain dealer (Henna) where they promise to pay you $500 more than whatever Carmax appraised your car at.
  - SoftTalker 4y ago
    Is there any evidence of this? I assumed they buy cars at wholesale auctions, maybe wash/clean them, and put them on sale, like any used car dealer does. I have asked a couple of used car dealers (not CarMax specificially as there isn't one near here) if they do anything to these cars to prepare them for sale. They just laugh. The margins are not there to repair any problems, so what is the point of inspecting them?
1123581321 4y ago
There isn’t going to be a fire sale. Their margins per car are positive and have only contracted about 20%. The margin isn’t enough to sustain their business, but the cars are priced in line with the market. Worst case, they would restructure in chapter 11 and continue to operate retail as normal.
- indymike 4y ago
  > There isn’t going to be a fire sale. That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.
  - 1123581321 4y ago
    If they can’t carry their inventory, they’ll go to another retailer through wholesale auction or direct buy, and show up for sale elsewhere at market prices. Carvana even owns an auto auction chain, which they bought to secure access to inventory but now might use to preferentially liquidate.
    - indymike 4y ago
      If Carvana isn't moving cars fast enough and is trying to liquidate inventory, just who is going to buy them?
      - nradov 4y ago
        Every other used car dealer will buy them. The auto auction market is highly liquid. Buyers have money.
- femto113 4y ago
  The value of their inventory is plummeting and those margins will continue to contract for however long it takes the last couple of bubble years to work their way through the system. Maybe the brand would survive a bankruptcy, but the equity definitely won't, and the bondholders are going to take a serious haircut too.
reaperducer 4y ago
This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities You say "potato," I say "potato."
rozap 4y ago
Maybe. Yes, the constrained supply caused a lot of people to overpay for cars, and the average monthly payment for a car surged over the last year. The deep sub prime folks will be struggling, especially as layoffs happen and people with no savings are stuck with a $700/m car payment. Repossessions have already started picking up, and there are reports of huge parking lots being filled with repo'd cars, and those cars failing to sell at auction. Obviously, if the big players can control supply enough, then I don't think there will be a fire sale. But it remains to be seen if they can accomplish that (I'd be surprised, I'll bet they'll have to liquidate and like you say, it'll all come crashing down). In any case, the Carvanas and Carmax type places, as well as unemployed consumers that have a big car payment on a soon-to-be-worth-a-whole-lot-less car are really in deep shit. Smells kind of like 2008, but this time with cars instead of houses. Source: https://www.consumerfinance.gov/about-us/blog/market-monitoring-examining-potential-credit-impact-high-vehicle-costs-for-consumers/ https://www.consumerfinance.gov/about-us/blog/market-monitor...
dylan604 4y ago
>Is March of 2023 the right time to pick up I hope so. I've been without a car since just before lockdown in 2020, and it has been long enough (by some time now). It's just an insane time to buy a car, so the time without continues to extend. I might be able to survive another 6 months ;)

shaburn 4y ago

Yes.

celestialcheese 4y ago

Probably more like July. It's going to take a long time for these loans to get liquidated, and then processed through the repo markets. And likely the lenders will hold the repo'd asset longer if they can to not create a glut of vehicles. The way this really get's great for buying repo'd sports cars is if we get forced liquidations from the lenders. It's going to be a bloodbath.

nfriedly 4y ago
According to some video I saw on YouTube, there's already a large number of repossessed vehicles that banks are being very slow to release to the market, because they want to keep the prices high.
- davewritescode 4y ago
  That's something that works when repossessions are still relatively low. Right now, most people are still employed and car payments are pretty high on the list of must pay bills, right behind mortgages. It's the same thing hedge funds do when taking or exiting a big position, move slowly to avoid spooking the market. If someone like Carvana has to liquidate cars at a loss to keep the lights on, you're going to see a FLOOD of cars hit the market as you'll have a rapidly depreciating asset and nobody will want to hold.

xnx 4y ago

Any reason those cars wouldn't sell at the going (probably high) used car rate at the time? e.g. https://publish.manheim.com/content/dam/consulting/ManheimUsedVehicleValueIndex-LineGraph.png https://publish.manheim.com/content/dam/consulting/ManheimUs...

twblalock 4y ago

If that was the case, why isn't the same thing happening to Carmax and Vroom and the other Carvana-style used-car dealers? Used car prices are falling and I assume it would hurt all of them, but it seems to be hurting Carvana more than the others.

avgDev 4y ago
Not sure about Vroom, but carmax actually performs proper car inspections before purchase. They are not moving fast and breaking things.
- reaperducer 4y ago
  Not sure about Vroom, but carmax actually performs proper car inspections before purchase. Those CarMax inspections are so valuable that vultures patrol the parking lot, and if you leave without selling your car, they'll follow you home and make an offer on your car. It happened to me. CarMax said the car was worth $8,500. I wanted to bring in my other car for an evaluation to decide which one to sell. A guy followed me to the grocery store across the street, approached me in the parking lot and started his pitch with, "I'll give you a thousand dollars more than whatever CarMax offered you." I asked him if he wanted to look under the hood and take it for a test drive or anything, and he said he didn't need to, because CarMax had already done the hard work for him. (My life situation changed shortly thereafter and I didn't end up selling either car.)
  - SilasX 4y ago
    Haha. In Austin I hear radio ads from a chain dealer (Henna) where they promise to pay you $500 more than whatever Carmax appraised your car at.
- SoftTalker 4y ago
  Is there any evidence of this? I assumed they buy cars at wholesale auctions, maybe wash/clean them, and put them on sale, like any used car dealer does. I have asked a couple of used car dealers (not CarMax specificially as there isn't one near here) if they do anything to these cars to prepare them for sale. They just laugh. The margins are not there to repair any problems, so what is the point of inspecting them?

1123581321 4y ago

There isn’t going to be a fire sale. Their margins per car are positive and have only contracted about 20%. The margin isn’t enough to sustain their business, but the cars are priced in line with the market. Worst case, they would restructure in chapter 11 and continue to operate retail as normal.

indymike 4y ago
> There isn’t going to be a fire sale. That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.
- 1123581321 4y ago
  If they can’t carry their inventory, they’ll go to another retailer through wholesale auction or direct buy, and show up for sale elsewhere at market prices. Carvana even owns an auto auction chain, which they bought to secure access to inventory but now might use to preferentially liquidate.
  - indymike 4y ago
    If Carvana isn't moving cars fast enough and is trying to liquidate inventory, just who is going to buy them?
    - nradov 4y ago
      Every other used car dealer will buy them. The auto auction market is highly liquid. Buyers have money.
femto113 4y ago
The value of their inventory is plummeting and those margins will continue to contract for however long it takes the last couple of bubble years to work their way through the system. Maybe the brand would survive a bankruptcy, but the equity definitely won't, and the bondholders are going to take a serious haircut too.

reaperducer 4y ago

This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities You say "potato," I say "potato."

rozap 4y ago

Maybe. Yes, the constrained supply caused a lot of people to overpay for cars, and the average monthly payment for a car surged over the last year. The deep sub prime folks will be struggling, especially as layoffs happen and people with no savings are stuck with a $700/m car payment. Repossessions have already started picking up, and there are reports of huge parking lots being filled with repo'd cars, and those cars failing to sell at auction. Obviously, if the big players can control supply enough, then I don't think there will be a fire sale. But it remains to be seen if they can accomplish that (I'd be surprised, I'll bet they'll have to liquidate and like you say, it'll all come crashing down). In any case, the Carvanas and Carmax type places, as well as unemployed consumers that have a big car payment on a soon-to-be-worth-a-whole-lot-less car are really in deep shit. Smells kind of like 2008, but this time with cars instead of houses. Source: https://www.consumerfinance.gov/about-us/blog/market-monitoring-examining-potential-credit-impact-high-vehicle-costs-for-consumers/ https://www.consumerfinance.gov/about-us/blog/market-monitor...

dylan604 4y ago

>Is March of 2023 the right time to pick up I hope so. I've been without a car since just before lockdown in 2020, and it has been long enough (by some time now). It's just an insane time to buy a car, so the time without continues to extend. I might be able to survive another 6 months ;)