Manheim Consulting’s Used Vehicle Value Index shows that used cars have more than recovered from their all-time low of just two years ago, and have hit their strongest levels since 1995. This isn’t wildly surprising, given that weak new car sales over the last two years have boosted demand for less expensive used options. What’s intriguing about the strong growth is that a recovering new-car market doesn’t seem to have dented pre-owned values much in the short term. Manheim’s report notes:
Because the new and used vehicle markets are both monthly payment driven, the important ratio is not transaction prices, but loan-to-value ratios, credit-adjusted APRs, loan maturities, and the resulting monthly payment. Given that new vehicle incentive activity has remained restrained and the model-year changeover was smooth, the monthly payment ratio between the two markets is not as far out-of-line as it has been at some points in the past.
Additionally, although there is waterfall effect that means new vehicle pricing eventually impacts all segments of the used vehicle market, the most effective transmission is through late-model used vehicles, especially those that represent a real substitute to a new vehicle purchase. With the reduction in off-rental units, late-model trade-ins, and early cycle repossessions, nearly-new used vehicles are in short supply. The average mileage on vehicles sold at auction has risen in every market segment over the past two years. And, with significant redesigns and new options, manufacturers have been able to make many models less susceptible to substitution pressure from the nearly-new market.
The significance of this trend: after two years of credit crunch-weakened sales, fleet buyers binged like crazy during 2010, largely fueling the new-car sales turnaround, especially in the early part of the year. Leasing is back in a big way as well: having fallen to just 9 percent of new car transactions two years ago, they’re back up to 25 percent. As these purchases (not to mention subprime repossessions) work their way back onto the used market, the supply of lower-mileage used cars could well increase, depressing the value of the entire used-car market.
So you’re saying I should trade in my 2005 Scion tC on a new Subaru WRX? I mean, that’s what I got from the article, although I might have been thinking about it a little already.
The interesting rejoinder to this is that new cars likely hit a historical bottom for ‘price’ in 2008 and 2009.
I’m not so much talking about the ‘Cash for Clunker’ phenomena, as the fact that a lack of sub-prime financing kept out the door prices at historical lows.
For example, a whole slew of cars could be had right near the 10k mark before taxes. Yaris, Versa, Rio, Accent, Aveo, PT Cruiser, and Cobalt, were all routinely price teased at or below that price level.
Now you have the GM and Ford models going upmarket. Chrysler is phasing out the PT Cruiser. Kia and Hyundai are moving their entry levels up a notch as well… and the Yaris is more in the 12k and up range at this point.
That’s just one segment of the market. But I would argue that until excess brands and capacity issues were addressed, the overwhelming majority of models were sold at prices that guaranteed a loss for the manufacturer.
Also, sub-prime customers substantially inflate the prices of new cars throughout all segment. These customers are willing to pay more because by and large all they care about is having the latest and greatest car at a certain payment point. Those payments can be spread six to seven years in many cases without that customer batting an eye.
Prime customers consider the out the door price and the interest rate as key separate issues, before pondering the monthly payment. They are far less willing to take on a six to seven year debt even for the uppermost echelon of vehicles.
Funny; I just received a friendly note from my Kia dealer that the used car I bought from them in April would make an ideal trade today. I’ve only made 7 payments. Obviously they have something newer to sell me.
I noticed my Mitsubishi had depreciated much slower than I had expected. I should just unload it and go find something older for the wife, like an 850 wagon. They’re starting to have high enough mileages that “normals” are afraid of them and prices get adjusted accordingly.