Money, like energy, is never lost. As the U.S. new car market heads down a hidey hole– chased by high gas prices, a cooling housing market and a sluggish economy– the used car business is booming. That’s because Ditech’s right: people are smart. OK, well, they’re not stupid enough to repeat expensive mistakes. In the last five years or so, tens of millions of American got burned by buying a new car. They’re mad as Hell and they’re not buying new anymore.
“There were approximately 43m potential new-car buyers in 2007,” CNW Research’s Art Spinella reveals. “That's the lowest level in years, which has typically been in the 51 to 53m range." An increasingly large percentage of these new car disparu are buying used. In 2003, 11.6 percent of American car buyers replaced a vehicle purchased new with a used car. This year, it’s 17 percent– and rising.
Why wouldn’t it? Depreciation has kneecapped millions of [former] new car buyers. Although Detroit has sworn off fleet sales (the surest way ever invented to hammer the residual values of a retail model) and promised an end to new car sales incentives (the second best way to strip money from existing owners), in the first case, the damage has been done, and in the second, it ain’t over ‘til it’s over. And it ain’t over.
The post-Katrina SUV exodus strangling Detroit’s profits is an on-going situation. Hundreds of thousands of truck owners [still] want to dump their shiny gas hog for a more parsimonious vehicle. Unfortunately, everyone wants to do the same thing. Being upside down, backwards and SOL has eliminated or lowered both their purchasing power and their desire to get stuck (i.e. buy) in another new car.
The fantastic proliferation of models and the end of the traditional “model year change” has also led consumers towards used cars. With so many cars, trucks, SUVs and minivans from so many different brands, it’s hard for the neighbors to tell (or care) that you’re driving an “old” car. Even more importantly, the traditional used car downside has been virtually eliminated. The average car’s durability and reliability has made the words “Why would I want to buy someone else’s problems?” only slightly more relevant as “Remember the Maine!”
Just as the country’s brand patterns have gone bi-polar (split between domestic and transplant), there’s an increasingly large and rigid divide between new and used car buyers. Again, the latter is gaining ground at the expense of the former. CNW reports that the percentage of car shoppers looking for one- to four-year-old models doubled; from 2003's 16 percent to this year's 32.4 percent. The coming economic downturn will only accelerate the trend.
There’s not much hope that these used car buyers will return to the new car market anytime soon. That’s bad news for carmakers already throttling back on production. But here’s the weird thing: local used car dealers are also suffering; the so-called “independents” sold 3m used cars in October, vs. 4.5m in September.
Private sellers are also losing out. "A year ago, casual sales [a.k.a. private sellers] were responsible for 38 percent of used-retail sales,” Spinella reveals. “November, however, is tracking at barely 33.4 percent.” Spinella attributes the decline to cash-strapped owners looking to dealers for a quick and easy way out of their vehicle. Besides, there’s a new kid in town, ready to hoover-up any clean-looking used car it can find.
Franchised dealers are the big winners in all this. Perhaps it’s a case of “the lesser of three evils,” but used car customers are happier buying their pre-owned transportation from a nationally branded dealer than a corner car lot or a friend of a friend (who knows a guy). The recent and dramatic proliferation of manufacturers’ Certified Pre-Owned (CPO) programs reflects their snowballing success in the marketplace. Aside from Jeep Wrangler sales, Chrysler’s CPO program is one of the few profit engines for their entire business.
Clearly, manufacturers must quickly take account of the used car boom and re-examine their business plan. American carmakers (in particular) built their empires on a class-based theory of planned obsolescence. They depended on status-seeking new car customers buying an endless succession of bright shiny objects. These days, new cars compete with used cars as well as other new cars. Any manufacturer who doesn't promote pre-owned examples of its product line faces an enormous and growing competitive disadvantage.
In that sense, the new used car reality also requires a new attitude. Carmakers must learn to view the used car buyer as one of their own, rather than "sloppy seconds." They must use direct, positive, relevant and ongoing consumer contact to keep used car buyers within the fold. Woe betides the carmaker who continues to view owners of used cars bearing their brand as second class citizens; the company that masters America’s used car buyers wins.
The desire to save money by buying new is a double edged sword. Buyers then open themselves up to unscrupulous used car sellers who hide needed maintenance, accidents, flood damage etc.
While it is true that many buyers of new SUVs are getting hammered at trade in time, there are used SUV buyers out there snapping up the bargains. If the new SUV buyer bought it right in the first place, i.e. put a downpayment on it in the first place, then by trading down to a car – which is usually cheaper, they can come out alright. I have seen many SUV traders recently trade down to a car, and even with negative equity, the cheaper selling price of the new car combined with the huge gas savings has them coming out ahead in monthly outlay.
Solid article. Personally, I think the depreciation alone will pay for a lot of repairs. But, as you point out, if you choose wisely, or even haphazardly, the odds are good that you will come out ahead with a used vehicle.
With the big 2.8’s attitude toward customers post warranty, I could also see them totally screwing up a used car business plan. Does a manufacturer profit directly from the sale of a used car ? If there isn’t instant profit they want nothing to do with it – even if they potentially lose a future customer.
Good editorial! Manufacturers initially got in the CPO business in spite of themselves, and now its turning the business model upside down.
When franchised new vehicle dealers make more money with used vehicles, than new vehicles, and squeeze independent dealers into a corner the business model is changing.
As the independent dealer through the years worked himself up the food chain of used vehicles, now the independent dealer is being pushed down the food chain by the manufacturers and their franchised dealers. Time will tell wether its a positive or negative.
The consumer initially was paying a substantial premium for a CPO vehicle, but as they become more widespread the consumer is no longer paying a substantial premium for CPO vehicles. This squeezes the independent dealers out of the market.
Once consumers realise and understand that the mission in life of CPO vehicles is to uphold “used vehicle values” for the benefit of manufacturers/captive finance/franchised dealers. The business model might change again.
It will be interesting to see franchised new vehicle dealers deal with excessive new and used inventories.
Perhaps it’s a case of “the lesser of three evils,” but used car customers are happier buying their pre-owned transportation from a nationally branded dealer than a corner car lot or a friend of a friend (who knows a guy).
That and the rest of the article is why Warren Buffet’s Berkshire Hathaway bought 6.4% of CarMax.
I accompanied a friend a few years ago when he bought from CarMax, a very nice and smooth process – they even gave him new Virginia license plates on the spot. He did pay at least $500 more than if he got it at a stealership, though.
Most stuff built these days is just getting broken in @ 100,000 miles. Plenty of solid buys in the $5000 range. Maybe I wouldn’t want my daughter taking it away to college but it’s fine for a work commuter for me.
As they say over @ beaterreview.com….
“Buying new is for suckers”
Good article. I just purchased an 06 Suburban 2500 with the 8.1L engine. I know, terrible gas mileage but I purchased this $55k stickered vehicle for $15,500 18 months after it’s original sale.
This vehicle LOST $39,500 or almost $2200 a month. I have a beautiful tow vehicle for cheap and I don’t take the big hit.
I was looking for a new diesel truck when I came across this. New car purveyors have a big problem indeed.
i think the buy used (esp CPO) argument applies most effectively to high end cars, where the depreciation is greatest (in actual dollars). getting a CPO 3 series for 25k would be an example of a wise buying decision. however, for the zillions of camcords and civollas out there, they tend to hold their value and the difference between a new one and a 2-3 year old example is often not that much. so for me it’s a new accord vs used, and a CPO bimmer or merc vs new.
The independent used car dealer seems to be being marginalized into the “buy here, pay here” corner.
I’ve helped several friends find and buy used cars lately and craigslist has turned out to be the resource of choice in all cases (they were looking for sub $5000 cars).
For a later model vehicle a new car dealer or perhaps Carmax is a safe way to go. Generally their vehicles have had any needed repairs brought up to date, something you don’t often find in private party or corner used car lot deals.
For bargain hunting (unless one has access to the auctions) then private party transactions make the most sense if you know cars and how to evaluate them. The local small used car lot really doesn’t have much going for it.
One buddy bought his slightly used car at the Hertz Car Sales lot two years ago and he has been thrilled with it. He got an Impala with 20k miles on it for about $9k less than he could have bought it new for.
The Detroit-3, typical of their short-term thinking, knew poor quality products, excessive fleet sales and generous incentives would only postpone the day of reckoning.
Domestic cars are disposable coincident with warranty maturity, accounting for the steep depreciation curve. Value engineering, producing products that become non-functional within a defined time frame, created a consumer backlash. Millions shed their loyalty and buy from Asian companies that cater to their desire for quality products.
Certified Pre-Owned vehicles address both issues. A purchaser benefits from the lower cost and gains an extended warranty, however daunting the prospect of frequent fights with the dealer to get them done may be.
We have to figure 2 other buyers:
1. The “everything with a pulse” financing customers have eliminated the credit unworthy buyers (these were the ones who kept the Big 2.8 afloat buying up their worst cars as they had the best deals – these people didn’t shop for cars – they shopped for the best deal). These customers are so tied up they will not be able to buy another new car until their 70% negative equity 0% 72 month loans get paid off (if they will at all).
2. The other credit poor but homeowners who took the $8-$10k in cash back and paid the remainder using up the last bit of their Home Equity or 2nd Mortgages now find themselves in a terribly depreciating asset they still owe money on and their housing values are dropping meaning they have no more money left to borrow.
These 2 customer groups are now out of the market – look at GMAC and the defaulted loans. Then take a history lesson and look at how the loose financing affected Mitsubishi (which also sold a lot of cars to fleets too). The Big 2.8 milked this market for all it was worth. Now they are suffering from defaulted loans and took these potential credit unworthy customers out of the market for 5-10 years as they have to get back on top of thier debt.
I second Paul’s thoughts on this. You have to look at each model and determine if new or used makes sense. For a Mini or basically any Honda/Toyota product, buying late model used barely saves money over new. I was at a Honda dealer where they had a previous year CPO Element priced higher than the current model year new vehicle on the lot. However, with a domestic vehicle, you can generally get a much better deal on a used late model vehicle. When I needed a commuter car, I specifically looked at rental queens and ended up with a 2002 Olds Intrigue for $5500 w/ 70K miles (in early 2006). An equivalent used Camry/Accord would have been 10-15K. That is a lot of maintenance and repairs to make up the difference, and the car is still going strong at 125K with only scheduled maintenance, tires and brakes.
I agree with HankScorpio, it depends on the vehicle. If you’re after popular models such as a 1-3 year old Honda Civic then you may as well buy a new one. However, some luxury models make for excellent used bargains – for example a 2005-2006 Acura RL can be had for $28-$32K, a $20K saving over new.
Good article. I have a feeling that craigslist.com will take up the slack for private sellers looking for a quick way to unload their ride.
I put my Dad’s car on craigslist (with his permission), wrote a detailed description and attached three photos, and the car sold within 24 hrs…for my asking price!
I will definitely consider buying a car from a private seller on craigslist.
I’m still a believer in the private party buy/sell. Just take your potential new whip down to AAA, pay your $100 and get the car inspected. I did this when I bought my last car, and got the seller to throw in new tires, new battery and new brakes… and I still got $1k off his asking.
If you want a deal (and a chance to see how the prior owner drove the car), go private party.
I found a 3yr old CPO 3 series with 34k miles for 25k. It was a lease trade in and they had all the maintenance records. Saved 10k over a new one which at the time was visually identical to the used one. They reconditioned the vehicle, put on new tires etc and added 2 extra years to the warranty for 6yrs 100k total. They also offered 3.9%/60mos financing for CPO cars.
I would think if the new vehicle price is down around 20k buying new might make more sense.
Leasing seems to make sense to me when the vehicle is over 35k and you plan to only keep it 3 yrs anyway.
I have had good luck selling several “trade in” cars to Carmax as well. Very easy and smooth process.
I jettisoned a 96 Eclipse at CarMax in ’06 and was in and out the door in an hour. Maybe I could have negotiated another $250 out of a private buyer, but the week or so of flaky Craigslisters would have been a waste of my time. So I paid a premium for the convenience. The mere fact I got any money at all for that poor, beat-up machine is slightly miraculous.
BMW and Honda aggressively advertise their CPOs. Part of their success is certainly their initial superiority, but there’s a marketing side to this as well.
Once you’ve bought CPO, I don’t know why you’d ever buy new… Then again, the “cost” difference between new and used isn’t really an accurate measure of the cost of ownership. Everyone talks about depreciation in year 1, but depreciation in year 3 ain’t no joke either. The headline cost of my CPO’d Audi was much lower than the “new” price, but that doesn’t necessarily mean that when I am ready to sell some number of years from now I will have saved anything substantial on depreciation and maintenance vs. buying new.
Still, the overall buying experience of CPO was just so much better than buying new – pricing of used cars is far more transparent than new cars, which is kind of absurd when you think about it.
Buying CPO is the best of both worlds. You’re saving a ton of money over a new car purchase and you have a warranty that runs the length of the payments for peace of mind.
Last year we searched around and wound up with a 40,000 mile Ford minivan, 4 years old, and looks like it rolled out of the showroom. This thing was only $8000 vs. around $25,000 for a brand new one. It was also a significant savings over a similar age/mileage Honda or Toyota minivan.
As HankScorpio says, there ARE exceptions, such as nearly new Hondas and Toyotas. Locally, if you want a Prius “right now” you can buy a 2007 used (ex-rental cars shipped up to Michigan from a Florida Toyota dealer), or – wait. If you wait for a 2008, you pay virtually the same price, and get ‘zero’ miles on the odometer instead of 20,000. I waited 6 weeks and bought a 2008.
Another exception. We decided that since we carpool and nearly don’t even need a 2nd car (but need a totally reliable 2nd car – my wife is a nurse) and we also did not want to spend a ton of money, yet needed to tow (and did not want a minivan or SUV), we leased a 2007 Hyundai Sonata 2.4 litre 4 cylinder car – it was zero down, $211 a month for 2 years, 12,000 miles a year. We’ll only use 6000-8000 a year. At the end, we might buy it but we may try the same trick again, or buy a zero APR Hyundai or maybe even a Kia Optima. Or Toyota or Honda. We need to be able to tow 1500 pounds. A Corolla can tow 1500 pounds, so can a Sonata four cylinder.
The fact that in Traverse City Michigan (northwestern lower peninsula), the Kia Spectra, Kia Sportage and Kia Optima are #1, #2 and #3 in sales also gives me another clue. (Traverse City is a little like California in that early trends can sometimes be seen here). People are shopping price and value. This bodes well for the Chinese (even if Chinese cars will bode poorly for Americans).
After a couple of decades of only being able to afford used shiet or new cheapies, I’m happy to spend the extra dough to have reliable new cars with a warrantee. Especially when used is the same damned money.
So I’m being a contrarian here, and saying – used is great, IF you can stomach Detroit’s crapola. I cannot any longer. Yeah, I’m a slow learner, it only took 30 years for me to figure this out, but Detroit makes crap, and if I want a decent car, it kind of has to say Toyota, Honda, Hyundai, Subaru or maybe even Kia on it.
There is a lot of truth to not bothering to buy used with the imports. At the beginning of the year when I was shopping for my own daily driver I looked at the Scion xB. Used ones with 10-15K miles were within a thousand dollars of a brand new one. Sort of startling. My common sense kicked in and I bought an older car for cash, but it was an interesting learning experience.
CPO can be way out of the wilderness for Detroit. Our 2003 CTS was purchased through CPO and from it we have learned the following:
It’s a damned good car, one that I can see serving us well for another 50K miles (we’ve put 50K on it after getting it with 38K).
At least at Cadillac, we have been treated very well by three separate dealers when the car has needed small warranty repairs (CD changer, front strut) as well as non-warranty repairs.
You save a lot of money. We were looking at a new CTS and the CPO car we found had the exact set of packages and the exact colors we wanted at a price that was $15K below the sticker.
We’ll probably be back for a CPO ’08 CTS sometime in early ’09.
I’m not sure that used car buyers are really lost forever as far as future new car purchases are concerned.
I’ve been bouncing around between new and used for years, depending on what appeals to me at decision time. I’m currently driving a four year old 911 that I picked up on a CPO program over the summer. It came with just over 25K miles on the clock, and sold for less than half of the original sticker. But the alternative was a new Cayman S for more or less the same price (about12% off MSRP). Although the newer car is marginally better to drive, ultimately the decision came down to practicality; a 911 just has a lot more usable space than a Cayman, and for a daily driver that’s what carried the day (I know it sounds absurd, but what critics always deride as the 911’s “useless” backseat is actually incredibly useful). New versus used simply wasn’t part of the equation.
The evolution of CPO programs has really changed the automotive landscape, expanding consumer choice while providing all the benefits of dealing with a new car dealer: easy trade-ins, financing, service, etc. And I’m not sure there was really any substantial extra cost involved compared to going with a private transaction. My review of craigslist, cars.com, etc. before closing the deal showed that when it comes to resale, Porsche owners generally aren’t offering any bargains.
All of that being said, and as happy as I am with my purchase, if Porsche really comes out with a double clutch transmission any time soon, I could easily find myself turning back into a new car buyer once again.
The average car’s durability and reliability has made the words “Why would I want to buy someone else’s problems?” only slightly more relevant as “Remember the Maine!”
Kudoos! You get the Dennis Miller Award for tripping off memories from the deep, cobweb covered portions of the mind.
The important stuff is in the last paragraph though. The smart folks have realized that depreciation costs more than gas, and the way to beat depreciation is to make owning one of your older cars a good experience. I wonder though, whether the manufacturers are still making much money on older car parts. There is a lot of competition for that dollar as well.
I like the picture that accompanies the article.
Like most rules, there are exceptions. As has been pointed out sometimes buying used doesn’t make any sense. I’ve seen used Scion xB’s, Toyota Corolla’s, and Mazda 3’s advertised within $1k of a new one in the classifieds as well. On the other hand, while looking at new Mustangs at a Ford dealer, they had a one year old Saleen Mustang with I believe 7,500 miles on it for $45k, and I’m certain I could have knocked another $5k off that price if I had wanted to buy it. They were asking $75K for a new Saleen on the lot. My wife bought a 1-year old Cobra Mustang back in 1996 for about half of the asking price for a new one with the added bonus that she preferred the ’95 body style to the newer ones.
I am also strongly in the non-CPO camp. I see two benefits to buying private party used. 1) I can see who was driving the vehicle and get a feel for how they drove it and maintained it by questioning them. 2)I cut out the dealer mark-up. Even though the person selling a used vehicle is asking for more than a deaer would give them in trade-in (why else would you go to the trouble of selling it yourself?), it will still be less than you would pay for the same vehicle at a dealer (why else would you buy it?).
Many states, like Arizona, have no sales tax on used private party vehicles as well. This can save a bundle of money for the buyer and tip them over to the used market….
Well, since the auto remarketing business is pretty much my life, I’ll offer a few quick points about the ‘used’ side of our business.
First off, you have several vehicles out there that have an exceptional level of popularity. Mini’s, Tc’s, Xb’s and the like. A few folks here have mentioned that the stickers on these are usually just a grand or two off list and there is a big reason for it. They are ‘finance fodder’.
Finance fodder represents those vehicles that appeal to those who are willing to pay a premium for the ‘fashionable’ vehicle. Five years ago they were primarily loaded up SUV’s with V8 engines. These day’s a Civic Si, Mazda 3 or Mini fits the bill quite nicely. So do loaded up and heavily customized Hummers, and anything that qualifies as a contender for the sequel to the fast and furious. Some of the buyers are ignorant of the marketplace, while others are making just enough cash (meant in the figurative sense) to finance their dreams.
It continues to amaze me how many folks out there buy a vehicle without knowing anything about it’s history. I DO include those vehicles sold by certain large used car retailers in that mix. Other than the Carfax/Autocheck history and post-sale inspection, most retailers are blissfully ignorant as to whether the vehicle’s prior owner was actually good to the car or not. In fact, it’s taken nearly a decade for many dealerships to realize that a dealer maintained vehicle can carry a price premium and eliminate a lot of uncertainty as well. A lot of indepenent dealers today are too cheap to buy a Carfax report, and the majority of them could care less. Why? Because there are still millions of customers who consider reading and research to be an avoidable hassle.
Last month, I sold 16 vehicles to what can loosely be called ‘the public’. Out of those 16, 15 of them were for $3500 or less, all were for cash (I have philosophical issues with financing) and nearly a third of my clientele was Latino (I can speak and do my bid calling in Spanish). Toyonda’s have always carried a premium. But surprisingly enough, so do older early 90’s SUV’s with low mileage (Broncos and Cherokees), Volvo 850/S70’s, and virtually any older minivan that has good leather in it. There are still plenty of sweet spots in the market, depending on where you live and who you serve. High mileage 4WD Imprezas can go for a huge premium in places like Ashville and Burlington. Not so in Atlanta. 4WD SUV’s may be the thing in New Jersey. In Florida they hold little sway. Every market has it’s differences and eccentricities.
My advice is to buy used, follow the points that were made in a certain writer’s used car series not to long ago, (Note: PLEASE get the vehicle inspected no matter who is selling it), and focus on finding a vehicle that will be good for the long haul.
I love cars… but I enjoy a worry free lifestyle even more. Most of my customers have the same attitude towards the buying and ‘keeping’ process.
Steve Lang,
The reason 10 year old pickups, SUV and Minivan seem to increase in price when they hit the 10 year mark is another phenomenon of the Used-market in the USA: Mexico!!!!
If a latino does not mind paying a premium for such vehicle, you will see named vehicle in-tow next winter bound to Mexico. Where they will be resold for a fat margin!
Excellent point rashakor! Ten to fifteen year old domestic cars and trucks can be imported into Mexico and there is a great demand for such vehicle. I see them in tow every day headed for the Nogales border.
There’s used and then there’s used. My strategy for years has been to buy a used-but-new-enough-that-it-still-has-some-of-the-warranty-left vehicles. With most Japanese/transplant vehicles offering 5/60 warranties on the engine and powertrain (which is to say, the stuff that if it broke would be most expensive to repair) you can buy a vehicle that is 3 model years old and still has a large chunk of its warranty left. Best of both worlds: New enough to still have a little of that “new car” smell but someone else has already taken the biggest depreciation hit.
I’ve bought 2 new cars (actually, trucks) in my life and will probably not buy another. There are too many late model used ones out there that still have some warranty (and a lot of life!) left in them.
Of course, the person who can afford a $17k used car is not in the same boat as someone who can only afford a $3k used car. Since they will be long off warranty, a lot of the usual caveats apply: Get the inspection, check the car out throughly.
But it’s beyond question that the general increas in the overall quality and longevity of cars has been a real boon to those of us who don’t buy new. A lot of misty-eyed Detroit lovers may talk about the golden age of the 1950’s and 60’s, but for those of us who like to drive, the golden age is right now.
This is a great article, thanks to the Author! I think most if not all Canadians buy used vehicles, its good to have them checked by Car proof or Carfax before signing anything and have them checked out by your own Garage for piece of mind