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.

Peter

14 comments:

Dad29 said...

Umnnhhh, yes, and no.

From personal knowledge I can tell you that dealers are NOT 'marking up new cars' to offset negative numbers on used ones. They can't, if they expect to SELL new cars.

(Or maybe 'markups' exist on a very few vehicles--or are almost irrelevant--say $100-$200--so that a prospect will not find it worthwhile to go down the road to get that $100.00.)

Instead, they are chopping expenses--including compensation levels for salesmen and service personnel--not to mention the charities, etc.

Anonymous said...

Locally the part of the market where supply is the tightest is the sub 4000 and sub 3000 market. Once plentiful, these cars and trucks are harder and harder to find. Who cares about clunkers? Aren't these things on the way to the scrap yard anyway? Well, they're actually critically important to the working poor, the disabled, the elderly, those with bad credit, those who can't or won't go into debt for a car, those who just can't stomach paying a HUGE mark up and interest at a "buy here, pay here" dealer. It may well be a bonanza for new car buyers and for people who can drop 10 to 20k on a car but for those on the margins living paycheck to paycheck it's tough sledding. It's getting extremely difficult to get any sort of reliable transportation without spending 5 to 8k. The days of buying a 1200 to 2500 vehicle and getting 6 or 8 years out of it are as gone as the 500 buck beater pickups you would buy for farm chores or hauling firewood with.

Just my experience in my area.

As an aside, I still see lots of 50 to 80k pickups and SUVs being sold off dealer lots. How people are affording them I don't know. That's like low/mid end house money in my neck of the woods. Between the payments which have to be getting to the 10 or 15 year point, the insurance and licencing I don't know how people buy these things. Plus in my state, Missouri, you have to pay Personal Property Tax on all vehicles and many other personal assets. On a new truck it is well over 3000 a year just for that vehicle in addition to the payments, insurance and plates on it.

Peter said...

@Anonymous at 8:17 AM:

"The days of buying a 1200 to 2500 vehicle and getting 6 or 8 years out of it are as gone as the 500 buck beater pickups you would buy for farm chores or hauling firewood with."

I agree. I'd say the $1200-$2500 bracket is now the $5000-$8000 bracket, and beater pickups can't be had for less than $3000-$5000 in this neck of the woods. However, that's not all because of supply and demand - it's also because of the declining value of the dollar, caused by ongoing inflation, which remains far higher than official statistics would indicate. That's affecting vehicle prices as much as it is other consumer needs - but our salaries aren't keeping pace, and in many cases are falling further and further behind.

LindaG said...

That was my complaint with the stupid "cash for clunkers" program. That all those vehicles, working or not, had to be destroyed. As you note, the working poor, disabled, elderly; heck, the welfare families, could have been given the vehicles for free or at reduced cost. It really made me angry when the government said they had to be destroyed.

Billll said...

So a $1500 vehicle now runs 2-4 times that and a sudden influx of relatively new vehicles with water still dripping out of them have just hit the market. Good thing there's no inflation (sayeth the government) and no less than scrupulous dealers dumping flood damaged vehicles on us at deep discounts.

Steve Sky said...

LindaG,
That was the whole point of the "Cash for Clunkers" program. Since American consumers wouldn't "voluntarily" (how I hate that word), buy "efficient, non-polluting" new cars, the gov't would destroy the old ones, and force you to buy the new ones. The payoff to the Detroit auto unions for their voting support was just a bonus.

B said...

If you are buying a used car, spend the $$ and get a decent bumper to bumper warranty for at least 5 years. Read carefully, and get a decent warranty. Repair costs are HIGH for newer cars, and you have no idea how the previous owner treated it.

If you do your research, at the end game of the negotiations, you can get the dealer to give you the warranty for his cost. (Example: Retail cost is ~ $4k, his cost is below $2k). Do this at then end of your negotiations. If possible, get a warranty backed by the factory. Ford or Chevy vs 3rd party.

SQT said...

Leasing has really changed the market too. My dad was a car salesman/wholesaler for over 30 years and he always told me that the car market can change on a dime because there’s so much inventory and markets vary from location to location. What I’m seeing now is a glut of used cars coming to market every year when the lease returns come back. I picked up a used suv last year with low miles that was priced well below it’s value as it was brand new and only had one owner.

Jester said...

It may be regional, as here in SE Wyoming we are not seeing a glut of anything. Nothing in Denver really either. I also can mirror that the cars that are 1k to 5k are like my current car. 216k miles on it. Most the cars in this bracket have -serious- issues. Want to get a truck? Expect it to have 150k on it and still pay 15K for it.

Dad29 said...

I should have mentioned earlier that in order to maintain profitability on car sales, dealers are using their "business office" to bring in revenues.

Typically, the regular car dealer does not finance a car purchase--he merely provides the information for a bank or captive finance outfit (GM Fin'l, Ford Credit, etc.) and in return, the dealer gets a slice of the interest. Then there are the "products," which include exterior/interior treatment, additional warranty coverage, and longer-term maintenance agreements (service contracts.) The dealer's net profit on those usually runs about $2500.00 or so.

Some dealers run games in the business office, jacking up their revenues by seriously inflating the interest rate paid. Be smart: get your own bank to quote you a rate and use any of the internet tools to translate that to payments (Microsoft Office has a tool in their Excel package.) KNOW THE RANGE OF PAYMENTS YOU SHOULD BE IN before you step into that office. Don't quibble with the dealer over two or five bucks/month, but know your limit and do not be afraid to get up and walk out. Remember, 72 months times $20.00 is $1400++ bucks!!

As to "cheap trux," here in the North all trucks are 4X4, and you don't want to buy a truck for less than $20K. Many dealers simply will not SELL them because they have a reputation to protect and don't like constant complaints about their sold goods.

graylady said...

As you look be very careful not to buy a "reconditioned", or formerly flooded, used car. You live in Texas and used car dealers are not above lying about the car's history. Remember the recent Hurricane and flooding in Houston? My boss's brother , who is a car salesman, says they are having a real problem with people who have bought a previously flooded cars coming into their dealership and demanding warrantied service on cars that are out of warranty due to flooding.

J Bogan said...

All you have to do is to adjust you car desires a bit. I have kept myself in cheap Jaguars for YEARS. Since I was 21, and I am near 60 Current one is a 99 XJR, supercharged sedan. I paid 500 bucks for it, the heater hoses under the supercharger were leaking. I fixed it in a long day (first time I had done that job). Even if you took it to a shop it would be less than 1500.00. So I have a car that cost 80 grand new, gets 18 mpg commuting, looks OK, and starts every day. It had 137137 on it when I bought it. XK8s can be had for 4 to 5 K all day long here, and the non supercharged sedans are 2 to 5 K. These were well built cars, they have some known issues, so find one where they have been fixed. Since they were spendy new, people generally take care of them. With what I have in it, it is essentially a disposable car, but I will most likely get 4 or 5 mostly trouble free years out of it.

Arrgh said...

Are you watching out for flood cars? Anyone know what my 2003 honda pilot EX with 102,000 miles is worth? It's in good shape. The tell you a value sites on the net are all over the place on a price. It's a spare car and I want to sell it to free up room in the garage.

LCB said...

Along the lines of what "B" said, I'd recommend a Dealer Certified vehicle. They're usually leased cars that have been traded in. You can buy them for several thousand less than a new car but still get 2 or 3 years of the remaining bumper to bumper and the 100,000 mile power-train warranty (at least with Hyundai.)