#used car prices
Why used-car prices are rising so much
On Tuesday I wrote about how a shortage of homes for sale in many areas, combined with an uptick in demand, is pushing prices upward. Something similar is happening in the used-car market.
A shortage of used cars – combined with higher demand from buyers who have lost a job, wrecked their credit scores or just become more frugal – has narrowed the gap between new- and used-car prices.
Since 2007, the average trade-in value of a 6-year-old car has escalated much more rapidly in percentage terms – and almost as much in dollar terms – compared with a new car.
The used car has risen by $2,124, or 33 percent, to $8,495. The new car has risen $2,434, or 9 percent, to $30,545, according to Edmunds. com.
Some late-model used cars that hold their residual value cost almost as much as a new version, especially if you factor in year-end incentives on new cars.
Auto experts say the run-up in used-car prices is abating, making this a good time to trade in a late-model used car (up to five years) for a 2012 vehicle.
“In terms of getting the best deal for a used car, right now is a good time,” says Jeff Piol. pricing manager with Edmunds.
Normally the magazine recommends buying a 2- to 3-year-old car because you miss paying for the years when a car depreciates fastest and still get a reliable car with the newest technology and safety features. “That pool of cars has dramatically shrunk,” Bartlett says, making new cars a better option in some cases.
In a recent blog post, Consumer Reports compared buying a 2012 car with a 2010 model (with 28,000 miles) and a 2008 (with 47,000 miles) for five popular vehicles. It assumed the buyer put 10 percent down and took out a five-year loan at 3.365 percent for the new car and 3.31 percent for used.
It found that a 2012 Honda Pilot would cost $531 a month compared with $496 for the 2010 version. For an extra $35 a month, the buyer could get a new car with zero miles and a full 3-year, 36,000 mile warranty, it said, concluding the new car was the better buy.
It deemed the 2008 Pilot a better deal than the 2012 version because the buyer would save $150 per month, which could offset maintenance.
However, for cars that are being redesigned for 2013 – such as the Ford Fusion and Honda Accord – buying a heavily discounted 2012 model might be better than buying a 2010 or a 2008. Payments on the new cars would be only $90 to $97 more than on the 2008 models. (Full report at sfg.ly/Pvzqt2 .)
Edmunds found examples where payments on a new car were about the same – and in a few cases, less – than payments on a 1-year-old car or a certified pre-owned car. (See sfg.ly/VmdrqK ).
Reasons for shortage
What’s driving the used-car shortage?
During the recession, new-car sales went off a cliff – plunging from 16.1 million in 2008 to 10.4 million in 2009. They started recovering in 2010 and are expected to hit about 14.3 million this year.
But the steep drop-off in 2008-09 means fewer used cars are coming onto the market. The sales slump included leased vehicles, which typically come back after two to three years. That explains why late-model cars have been in especially short supply.
Meanwhile, people are also holding onto their vehicles longer. The average age of cars and light trucks on the road was 10.8 years in 2011 compared with 9.8 years in 2007 and 8.8 in 1999, according to Polk, an automotive research and marketing firm.
Patrick Nohr. an independent used-car dealer in Walnut Creek who also brokers new cars, says the supply of used cars got so tight he started running an ad in a local paper last year asking people to sell him their cars. He’s still running the ad, even though he gets few responses.
“Good used cars are still hard to come by,” Nohr says. He says he used to buy a lot of late-model lease returns at auction, but prices got so high he can’t make a profit after he reconditions them. He says he is outbid by dealers who can sell them as certified pre-owned, and command a high price.
He said low-end cars – the kind parents buy for their kids – are also hard to find, in part because of programs in California that paid people to retire older vehicles. “Cars we might have sold for $3,000 to $3,500 a couple years are now $5,000 to $5,500,” he says.
Mid-range cars are also in demand from people whose credit has been affected by a home or job loss. “They have to buy cars they can pay cash for,” and they might have saved up $7,000 or 8,000.
Meanwhile, dealers can cut prices on new cars and attempt to make it up “on the back end, with extended warranties and undercoating,” Nohr says.
Linda Goldberg, a car buying expert with CarQ who represents buyers, says consumers who trade in well maintained cars should expect to get more than the trade-in values published by sources such as Edmunds.com, Kbb.com and Nadaguides.com.
“What I’m seeing in the last few months is dealers offering $1,000 or $2,000 more than the published trade in value. I haven’t seen that happen in a very long time,” she says.
A better target for sellers would be the private-party value.
She is working with a client who is trading in a 2010 Audi. For a similarly equipped car, the trade-in value according to Edmunds is $36,505, the private party value is $38,686 and the dealer retail (what a dealer would supposedly sell it for) is $41,023.
But she has seen dealers advertising this car for $44,681 to $48,990.
If the client sold it himself, he could expect to get $44,000 or $45,000.
At a plateau
Piol says used-car prices seem to have reached a plateau and “will probably soften” as more supply enters the market and more buyers opt for new cars.
The National Automobile Dealers Association does not expect the supply of late-model used cars (up to 5 years old) to begin increasing until 2014, says Larry Dixon. a senior automotive analyst with the NADA Used Car Guide .
But he has seen “some softness” in the price of used compact and midsize cars in the past few months. “Consumers have become desensitized to fuel prices and we haven’t seen prices” for small and midsize cars grow like they did a few years go. What’s hot in the used-car market today are sport utility vehicles and pickups.
With car values depreciating more slowly, consumers find themselves with positive equity – meaning their cars are worth more than they owe – much sooner than in the past, Dixon notes.
Now if we could just get homeowners in the same position, the economy would be in better shape.
Consumers hot for used cars
The price of a used car has escalated more rapidly, in percentage terms, than the price of a new car