The recent surge in leasing makes this a great time to be a used car buyer, especially if you’d like a little luxury mixed in with the low price.
There’s been no better time to buy because of what’s been happening in the past few years. Anil Goyal, senior vice president of automotive valuation and analytics for Black Book, says depreciation is favoring buyers, as well as low fuel prices, good credit, and a steady supply.
“Despite the industry’s continued efforts to maintain a strong pace of sales on new cars and trucks, the increased level of supply in the used market has begun to weaken prices on both cars and trucks,” said Goyal. “We saw the first sign of this in 2015, when cars saw above-average depreciation on the year, and this year we will see rising depreciation for truck segments as well.”
The increase in leasing is one of the culprits. It’s causing more supply of younger used vehicles to come back. Leasing is a tool to create loyalty, Goyal said (as well as to move more expensive vehicles buyers couldn’t otherwise afford). It makes customers come back every three years.
That creates a continuous loop of sales, but the downside for car dealers is that they then must sell the vehicle that comes back. “It really has impact across the board,” he said.
Leasing now accounts for one-third of all new car sales. Lease terms tend to be about 36 months, which helps analysts like Goyal predict what used car supply and retention value will be three years out.
There’s an interesting twist in leasing when it comes to pickup trucks, and it’s going to affect used prices for them. Working pickups usually aren’t leased, because they are kept for longer than three years and get worked hard. (Leases typically only allow for minor wear and tear, which could add additional expenses to leased pickups.)
However, pickups packed with the latest in technology driven by people who like them but never get them dirty (think Ford F-150s costing $60,000 or more) are being leased in higher numbers. And, you’re going to be able to get better prices on those trucks used.
Used car buyers typically look for value and don’t want to pay for technology (especially three-year old tech). Used cars loaded to the gills with bells and whistles depreciate faster than stripped down versions. That means you can get more bang for your buck.
Cheap and available credit is another factor in lower used car prices. As Goyal points out, pretty much anyone can get a loan and lengths are getting longer with some as high as 84 months (or seven years). Plus, the Federal Reserve Board seems to be indicating interest rates will rise – but not that much. “In talking with the hundreds of lenders we provide information to, we’re getting the sense that’s not going to dent credit availability that much,” he said.
Don’t be discouraged by reports that used car prices were at their highest ever in the first quarter of 2016. Goyal said that’s more a reflection of the data set being used (i.e. the age and price of the used cars included). Black Book scours data from hundreds of used car auctions a month to set its prices.
Goyal said used car buyers are benefitting from what he terms a “maturing” economy. There was white-hot demand as the economy picked up and people could afford better transportation. “You can stay in your parents’ basement, but you still need a vehicle to get to work,” is how he described Millennials hitting the workforce.
Now we’re at a more mature economy, according to Goyal. The country’s GDP still growing. There have been more new car sales in last three years. That dynamic is going to cause retention values to come down, he said. Retention values are the industry term for what a used retains in price after a set time frame. It’s fairly similar to depreciation.
Here are the historical three-year retention rates and the projected residual forecast on an average three-year-old vehicle according to Black Book:
- 2012: 53.8%
- 2013: 54.5%
- 2014: 54.3%
- 2015: 54.1%
- 2016: 52.0%
- 2017: 50.1% (forecast)
- 2018: 48.6% (forecast)
- 2019: 47.8% (forecast)
Consumers are going to see the best retention values in the sub-compact (think Honda Fit) and compact (think Toyota Corolla) segments. Goyal said depreciation in those segments has been over 20 percent year-over-year.
Last year in the subcompact segment, the average three-year old price for a used subcompact was $11,000. “That’s a pretty good drop for a low-priced car,” Goyal said. The drop in compacts hasn’t been as dramatic, but it’s still there. In that segment, the price last year was $12,600. In 2016, the number is $12,400. “You’re seeing that combination of where supply is high and demand is low.”
One would think the opposite would be true for crossovers – and it is, to an extent. Last year, the average price was $27,400. This year it’s $28,600. That segment is going to soften, though. Exercise a little patience, and you’ll see prices drop. The depreciation will be there, but it will be slower, until more crossovers continue to come off-lease.
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