There’s been a slow, yet steady change in the automotive marketplace over the last eight years, and you, the consumer, have been the lobster sitting in the pot as the change has occurred. The market has gotten significantly worse for car buyers. The number of franchise and independent dealers has been reduced by almost half. And yet, those surviving dealers have had an unprecedented run of year-over-year growth since 2008.
But as that growth has slowed in 2016, car buyers find themselves paying more money for used cars than ever before. We know that the typical American household can’t afford the typical new car sold in America, but we may soon be approaching a day when that same household can’t afford the typical used car, either. In fact, according to NADA Data, the average used car transaction price in 2016 will crest $20,000 for the first time in history, and will be 59.1 percent of the average new car transaction price of $33,903.
What does all of this mean to you? That buying used may not be the smartest financial choice you can make. In fact, it might not be very smart at all.
The spike in used car pricing can be attributed to a number of issues, but most experts attribute it to two happenings.
The first of these was the Car Allowance Rebate System, otherwise known as “Cash for Clunkers,” in 2009. Nearly 700,000 used cars were taken off the road through the program, resulting in 2.8 billion dollars of rebates. Between 2009 and 2010, used car transaction prices jumped over 10 percent, from $14,946 to $16,474, the biggest jump in history.
The second: Hurricane Sandy in 2012, which caused a massive wave of destruction on the east coast, flooding roughly 250,000 cars. However, despite this massive reduction of available inventory, used car prices didn’t jump significantly in 2012, rising only 3 percent.
To see why used car prices are so high today, we need to go back even further to the economic crisis of 2008.
At the beginning of 2009, there were 20,010 new car franchises in America. Today, that total is 16,288, a decrease of nearly 25 percent. The average mid-size market has 16 fewer dealerships than even five years ago — seven fewer franchised dealers and nine fewer used-car dealers.
But Americans will buy six million more new cars in 2016 than in 2009. Why?
Simple. The mega-stores are selling much, much more than their fair share. In fact, according to NADA, dealers with more than 50 employees now account for nearly half of all cars sold in America. Even more simply, there are fewer stores, but the bigger ones are doing twice the business they used to.
This is bad news for everybody — everybody except the big dealers, that is. Independent lots now have to make even more money per car than they used to, because their volume is down. Conversely, they also have to spend more money per car sold to advertise, because the big dealers get volume discounts from third-party advertising sources.
The net result? Used car prices go up, especially in comparison to new cars. Purely from a price perspective, there has never been a worse time to buy a used car. One can easily argue today’s used cars are also much better than used cars from 2008 — but isn’t the quality of new cars better, too? That’s what enables used cars to be more durable and last longer: new cars are made better.
So what’s the consumer to do? Well, everything points to buying new as being the best way to recoup your investment. If used cars cost more than they ever have (both as a percentage of new car price and in gross dollars), then the new car buyer can be assured that his new car will depreciate at a lower rate than it would have even eight years ago. The impending lease bubble is bad for OEMs, but very good for used car residual values.
It can certainly be said that used car residuals will be better, too — all the data indicates that. However, if the depreciation curve is less steep than it used to be, buying new isn’t nearly as punitive.
So if the Internet tells you that you should buy used, then just smile and point to the data. While buying used might still be a smart play, it’s getting worse, and buying new just keeps getting smarter.