Tuesday, October 31, 2017
As predicted, the used car market seems to be shaking out
Back in April, I linked to an article that predicted a major decline in used car prices - perhaps as much as 50% over the next couple of years. A few months later, I linked to other sources that pointed to the US auto industry as a whole being in serious trouble, largely because of pricing issues.
I'm now seeing those predictions play out in reality. Miss D. and I have been considering replacing one of our older vehicles. Due to the astronomical prices demanded for new vehicles, we've ruled out buying one, and are looking at relatively recent-model used cars. During our search, I got to know several sales people well enough to ask for information "off the record". They told me that many dealers are having serious problems reselling the used cars they've taken on trade for new vehicles. Their customers demand what they see as "fair value" for their trade-ins, but that fair value is based on what they paid when they bought them - not what the market is pricing them at now. If the dealers don't offer that "fair value", the customer turns around and walks out the door, going to the next dealer down the road. Sooner or later (usually sooner), a dealer desperate to sell his new stock will offer them something close to what they want. However, that dealer will then have to re-sell the traded-in unit . . . and may not be able to get back what he paid for it, due to declining used car prices caused by a glut of off-lease vehicles flooding the market (as noted earlier). That means the dealer has to recover his loss on the traded-in vehicle by marking up - or giving lower discounts on - the prices of his new cars. That makes them even more unaffordable to the average purchaser, so he has to offer better trade-in values to persuade customers to buy them. Talk about a vicious circle!
This also means that there are tremendous bargains to be had right now in sectors of the used car market that are less popular with the average buyer. For example, some used full-size cars (or, at least, what's called "full-size" today - which is not what it was!) can be had at extraordinarily low prices right now, compared to smaller vehicles that are perceived (not always correctly) as more economical, or the more fashionable SUV's and pickups. Miss D. and I are actively considering one large car that's amazed us with its drop in value. This model sold new in 2016 for a list price (MSRP) of approximately $40,000 for a top-of-the-line edition. Because it was a sedan, and therefore less "fashionable", the manufacturer had to offer some serious incentives to buyers (at times up to 20% of MSRP) to move it. Then came the glut of off-lease cars, most of which were smaller and (allegedly) more economical, and therefore more popular with less informed buyers. That meant dealers could charge a higher price for the smaller vehicles, and make a larger profit per unit, than they could on larger, more expensive, less popular models. The inevitable result was a dramatic decline in the value of the bigger model, so that (at the dealer we're using at present) five examples from the 2016 model year are available for less than $15,000 - under three-eighths of their new MSRP just a year ago! That's astonishing in anyone's language, but very good news for us. Prices on the five range from under $12,000 for a base model, to a couple of thousand more for versions with all the bells and whistles, including every computerized electronic convenience we could want (and some we don't).
It seems that more "fashionable" used vehicles, such as SUV's and economical town cars, have been holding their unit value better than large sedans; but even those classes of vehicle are now showing increasing downward pressure on prices. Just this year, I've seen declines of up to 20% in the used prices of some less popular, smaller SUV models in local markets. (I've been following them, due to our need to replace a vehicle.) There are lots of them on the market, in part because rental car companies bought them by the thousands to cater for their customers' preferences. They have to turn over their fleets before they lose too much value, so they're forced to put them on the market before they get too old. They compensate for the declining value of their used vehicles by increasing their rental rates. One way or the other, we, their customers, pay for it.
Be that as it may, Miss D. and I aren't complaining. It looks like we'll be able to get what we want at a very much lower price than we'd have had to pay even last year. What's more, all the depreciation in market values has already been priced into it. We plan to keep it for the longer term, so we won't worry about any further decline in its value (which is, in any event, unlikely to be anywhere near as great as what it's already lost).
I don't know if these trends hold up across the country, but they certainly seem to be true for cities within a couple of hundred miles of our home. If you're prepared to be flexible in your requirements and shop around, working with a trustworthy dealer (they are out there, if you look carefully), and wait for the right deal to come along, there may be some outstanding bargains to be had right now.