Used-car prices are sliding, a boon to penny-pinchers, but troubling for new-car sales.
The auto industry sales recovery in recent years means millions of used cars, many coming off lease, are starting to flood the market. The result is a decline in used-car prices that zoomed sky-high after the recession. The decline is leading to talk that new-car auto sales growth may be peaking, however as I have talked about on the show for weeks, much of this is a seasonal drop, as all used cars turn a year older at the end of August.
“We’re going to see a tremendous increase in used-car supply over the next couple of years,” says Larry Dominique, an executive vice president of auto-pricing site TrueCar.
That used-car cascade could dampen new-car sales in three ways:
•Less valuable trade-ins. Car shoppers may find their trade-ins are worth less than they expected when they go to buy new vehicles. That means they’ll have to shoulder larger new-car loans or forgo the purchases.
•More expensive leases. Lease rates for new vehicles are based on predicted resale value. As resale prices fall, automakers adjust predicted depreciation schedules and have to raise lease prices.
•More attractive used cars. In recent years, used-car prices were so high that car shoppers found they could buy a new one for not much more. Now the pendulum is swinging back, says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.
Wholesale prices were down 0.4% in August vs. a year ago, down 1.6% from July and “prices should continue to trend down as supply outpaces demand,” writes Tom Kontos of Adesa Analytical Services, which tracks wholesale prices for used cars, in a note to the industry.
At retail, the average used car sold at a franchised auto dealership went for $10,883 last month, down 1.6% from a year ago and 2.4% from July, says CNW Research.
Lower used-car prices are a delayed response to the new-car market’s revival from the recession: From a bottom at 10.4 million in 2009, new-car auto sales are on track to break 16 million this year.
Fewer trade-ins in the recession caused wholesale used-car prices to soar more than 25% to a peak in May, 2011, before leveling off, according to Tom Webb, chief economist at Manheim Consulting. August was the fourth straight month of declining wholesale prices, but he says talk of pricing free-fall is “premature.”
“We’re definitely seeing prices fall,” says Duane Paddock of Paddock Chevrolet in Kenmore, N.Y. The decline is real, he says, but it’s “not like Niagara Falls. We’ve seen a gradual drop.”
Not every region has seen falling prices yet. Pete Greiner of Greiner Ford and Lincoln in Casper, Wyoming, says prices remain stubbornly high for the used vehicles most in demand in his energy-rich area: pickup trucks. Prices are “high, high, high” at the auction where he buys his inventory, he says.