By on August 22, 2016

dealership

One- to three-year-old-vehicles are pouring back onto dealer lots, but the predicted drop in used vehicle prices hasn’t happened yet.

Consumer choices (meaning: trucks, trucks, trucks) and the high value of returning vehicles are keeping used prices near record levels, but analysts still expect a drop later this year, Automotive News reports.

The Manheim Used Vehicle Value Index rose for the fourth straight month in July, coming to within a half point from its highest level ever, recorded in 2011.

The reasons for this are many. Trucks and SUVs depreciate less than sedans, and this has pushed overall used vehicle prices higher. The relative health of the U.S. economy and the industry’s updated used vehicle selling practices also helped lower used vehicle depreciation.

Eventually, the tide has to turn, and forecasters expect the growing glut of off-lease vehicles to help it. 3.1 million off-lease vehicles will hit the market in 2016, up from 2.3 million last year. That number is expected to rise to 3.8 million by 2018.

Jonathan Banks, executive analyst at NADA Used Car Guide, told Automotive News that dealers “look at what will the market bear, and they price accordingly.” He expects a decline in used vehicle prices later this year.

Flattening new vehicle sales, as well as boosted incentives on new cars, should help the overall used vehicle market decline in value. The overall drop won’t be huge — current predictions point to a decline of five percent or less. That’s already happened in some segments, with subcompact vehicle recording a 20 percent drop in resale value since the start of the year.

[Image: Faris/Flickr]

Get the latest TTAC e-Newsletter!

Recommended

51 Comments on “Off-Lease Vehicles Are Flooding Lots, so Where’s the Drop in Used Car Prices?...”


  • avatar
    CoreyDL

    “Jonathan Banks, executive analyst at NADA Used Car Guide, told Automotive News that dealers “look at what will the market bear, and they price accordingly.” He expects a decline in used vehicle prices later this year.”

    First of all this guy has kinda crap grammar. And second, it’s the most obvious thing anyone has ever said.

    I doubt there will be a decline. If every business keeps prices high, they all win – have to buy a car sooner or later. Interest rates are low enough that money is easy to access. The only thing which would knock down the prices is if interest rates take a hike and restrict the flow of money.

    • 0 avatar
      warrant242

      Yes. Prices are artificially high, same as for housing. But if the party keeps rolling, at what point does artificial become real?

    • 0 avatar
      sportyaccordy

      “If every business keeps prices high, they all win – have to buy a car sooner or later.”

      Not really. There’s two major costs for dealers selling used cars- the cost of getting + rehabbing the car, and the cost of keeping the car on its lot. Holding onto cars in the hopes that it will sell at some exhorbitant price costs money. If dealers want to keep things moving they will strike the right balance between profitability and selling speed, which means lowering prices if necessary.

      Plus if there is a glut of off-lease cars, and financing remains cheap, prices could go down further as it could remain cheaper to lease new than buy used. Only real potential game changer would be widespread adoption of CPO leases which is gaining momentum.

    • 0 avatar
      Sigivald

      ” If every business keeps prices high, they all win – have to buy a car sooner or later. Interest rates are low enough that money is easy to access. ”

      But for that to work, nobody has to want to sell a car *now* (and get someone’s business by having a lower price, which brings people in).

      Every used car dealer has to sell cars, today, or go out of business.

      They can’t collude like that for the same reason OPEC doesn’t actually work – cartels require people not defect, and there are *lots* of incentives to compete on price, like “actually getting customers to come to you, not someone else”.

      (“Free money” loans and low interest rates do drive up prices of goods in demand, true.

      It’s just not that “they’re all keeping prices high because we need cars” – remember, they *need to sell* even more than we need to buy. We can buy a new car, or a private sale car, or find ANY dealer willing to defect from the “keep prices high” cartel; we have other options.

      Used car sellers have no other options than to sell us their inventory, or go bankrupt.)

  • avatar
    87 Morgan

    The answer is that used prices are most likely to increase in the near term. Exhibit A. Louisiana is underwater, I can’t fathom how many totaled cars are down there but it is in the 100’s of thousands. Exhibit B. The hail storm in Co. Springs 3 weeks ago that wiped out an estimated 30k cars.

    We still have a lot of old rigs on the road that are in need of permanent retirement. How many 90’s era Explorers do you still see as an example?

  • avatar
    SCE to AUX

    Some niche segments have very low prices, like used EVs (Leafs). Off lease, they’re listing for $7-9k with 21-27k miles. They have the fastest inventory turns in used cars.

  • avatar
    Jeff S

    Mention of the flood brings another problem of these flood damaged cars being resold across the country. Unfortunately most later model vehicles will be sold at the auctions and returned to the market to be sold. This is one time there needs to be regulations that prohibit the sale of flood damaged cars or at the very least these vehicles be sold to the retail consumer as flood damaged. This is another reason to buy new and get a no or low interest financing.

  • avatar

    A certain former TTAC writer had written about how auto auction companies have become very accommodating to overseas buyers. My guess is that keeps the prices up as well – if there are bargains to be had, they will be purchased by someone who can ship it abroad.

  • avatar
    PrincipalDan

    This makes me wonder about areas with a strong presence of the automotive industry. When I lived in Southfield MI there were dealers who had whole sections of the used car lot devoted to off-lease creampuffs and the deals were usually pretty decent.

  • avatar

    Dealers must hate these lease returns… It was HELL returning my Dodge Dart.

    One dealer told me over the phone that I could bring my car in ANY time. I come in and they say “has to be during Ally bank hours, come back tomorrow during that time”. I come back the next day and they give me run-around about getting a pre-inspection. (Ally doesn’t even do pre-inspections!) I call them incompetent idiots to their face and they basically told me to take my car somewhere else.

    Of course every dealer only had someone who could take the lease return M-F 8-5. Real convenient for anyone with a job.

    Oh well, now I’m driving an FR-S and loving every second of it.

  • avatar
    Jeff S

    Used pickups, suvs, and vans are in demand in Mexico. Not that hard to ship these types of vehicles across the border which also helps to keep their values up.

  • avatar
    28-Cars-Later

    Before the depression, trucks and BOF SUVs had more favorable depreciation BUT their valuations were very in tune with fuel price moves. Today, it seems this is still true except they seem to have broken free of dips and spikes from fuel prices. Demand is likely higher on these now than in 2005-10 since your other product choices have been seriously compromised from 2010 to present. The road to hell is paved with unintended consequences.

    The other factor here is expanded subprime lending. The easier the loans, the more money floods into the market and keeps prices artificially higher despite increased supply.

    • 0 avatar
      Speed3

      Also crossovers/SUVs get much better fuel economy than they used to, so their resale value is less tied to oil prices.

      I suspect that part of the move to Crossovers is also attributed to better fuel economy, there really isn’t the mpg penalty like there used to be.

      • 0 avatar
        28-Cars-Later

        I see it as partially a fuel economy improvement but I think much of it is motivated by the inexplicable compromises made on traditional sedans. I also think the BOF SUV and truck markets have expanded because those with money will pay more for what was standard fare ten years ago vs the transverse “crossover” who offers little true utility.

      • 0 avatar
        duffman13

        This right here. Take the CR-V and an Accord for example. They are rated 26/33 and 27/36 respectively in 2WD guise, which amounts to a negligible amount of money annually unless you’re truly broke.

        In real life, the compact crossover is absolutely competing with (and beating) midsize sedans. You get a spacious and easy to use cargo hatch, good rear seat space, head room, and arguably more usable space for the driver, and a higher seating position with better visibility. Compact CUVs and Midsize sedans often share the same engine and most non-suspension mechanical components as well so maintenance is easy and cheap.

        Personally I’ll probably stay in a car when it comes time to get my next vehicle, but that doesn’t mean I don’t understand why the market likes CUVs.

    • 0 avatar
      jacob_coulter

      From a relative that owns a dealership, he’s floored at what lenders will now chase to give a loan. Subprime loans have gone mainstream. It’s all about chasing yield with zero percent interest rates, and usually cautious institutions are increasing their appetite for risk to get there.

      Just like with housing, once everyone with a pulse can qualify for a loan, prices tend to inflate. Eventually it will pop, but I have no idea what a subprime car loan meltdown will look like.

      • 0 avatar
        hreardon

        The difference with used cars versus real estate is that the value of used cars generally declines to zero over a ~10-12 year lifespan. At some point the car is worth scrap value and will have to be replaced.

        Not necessarily so with housing.

        • 0 avatar

          Repoing a car is typically easier than a foreclosure/eviction on a house. You can also easily ship a car to another state/country where it’s worth more, but if you foreclose on a house in a neighborhood that nobody wants to live anymore, you can’t do much about it.

          So I don’t see a bubble burst in auto lending as quite as dangerous as one in real estate, because the collateral is easier to take possession of and liquidate.

      • 0 avatar
        28-Cars-Later

        “once everyone with a pulse can qualify for a loan, prices tend to inflate.”

        Bingo.

        “I have no idea what a subprime car loan meltdown will look like.”

        I’d be interested to see figures. If say 1/3rd of all annual production is subprime (about 5 million), and 50% of it goes belly up, we’re talking 10 million loans over a four year period (mistyped 20 instead of 10). I wonder how many were involved in the housing speculation bubble?

        • 0 avatar
          Adam Tonge

          From 2007-09 lenders began foreclosure proceedings on 6.4 million properties.

        • 0 avatar
          jacob_coulter

          Outstanding auto loans are over a trillion dollars now and subprime is something like 20% of that amount.

          So if there is a collapse in subprime auto, it could have some serious financial consequences as its now a much bigger market than it was in the past. It would also effect loans outside of subprime if vehicle values are destroyed.

          • 0 avatar
            Adam Tonge

            I think student loan debt is a bigger bubble. Especially because there is no collateral attached to it. Twelve years ago, student loan debt was under $260 million. Now? $1.26 trillion.

          • 0 avatar
            28-Cars-Later

            I agree, but I think the auto loan bubble will pop sooner.

          • 0 avatar
            warrant242

            Yeah but Uncle Sugar’s gonna backstop those eventually.
            Can’t see that happening for automotive.

            Student loans generally cannot be discharged in bankruptcy, unlike auto loans. But then, as has been pointed out, people will pay on their car note as their highest priority until they pretty much hit bottom.

  • avatar
    kwong

    If this analyst is correct, it might not be a bad idea to short Carmax and other used car companies. They might do more sales with a lower priced product, but they’ll take a hit if prices drop 5% when their inventories were set and projected to sell at 5% higher. Might not be a bad idea to go long an auto parts supplier as a hedge. Both new and used cars need parts.

  • avatar
    Felix Hoenikker

    Used car prices are in bubble territory. The problem with bubbles is that they always last longer and rise higher than expected. But they always pop, and when they do the prices always return to pre-bubble levels.

    • 0 avatar
      hreardon

      Automobiles aren’t the same as housing. I suspect that we’ll see a more gradual drop in used vehicle prices than others are suspecting, especially if there are expanded markets for export, etc.

      Unlike houses, vehicles fall apart on a fairly predictable timeline that varies based on use: an F-150 used daily on a construction site isn’t going to last as long as Mr. Suburban dad who commutes to work in it. Additionally, most vehicles today have better fuel economy and are without a doubt, better built (on the aggregate) than ten years ago. Combine that with low gas prices that will likely remain within a low-moderate range for the foreseeable future and I think we’re going to see a slower deflation of this bubble than some commentators here imagine.

      History and data shows that people will make their car payments before their mortgage payments, so repos should remain, as a percentage, low. Granted, we’re bringing in a lot more subprime but so long as jobs are a available this won’t be too much of a problem.

      We’ve got natural disasters, accidents, new export markets, heck, even VW diesels etc. All of these are unpredictable and can help nudge the market in one way or the other. It is not a given that we will see a collapse in prices. A slow deflation is more likely (and preferred, for obvious reasons).

  • avatar
    NoGoYo

    Still waiting on prices of old junk to come down…the T-Bird isn’t long for this world with its ever-increasing oil consumption but my car budget’s tighter than ever. Yet I go on Craigslist and everything for $1000 or less is stuff I’d be insane to buy, like super ratty Maximas and half-dead Corollas.

    • 0 avatar
      CoreyDL

      Indeed, the $1000 working used car is more a thing of the mid or late ’90s than today. All gone, all gone.

      • 0 avatar
        28-Cars-Later

        RWD Volvo

        • 0 avatar
          NoGoYo

          I haven’t actually found one of those at all on Craigslist in a while. Guess they just aren’t popular around here.

          Shame, a turbo brick wagon would be pretty sweet.

          • 0 avatar
            28-Cars-Later

            They float around but are so old they aren’t common these days. You may have to travel to find one, and they are not going to improve your mileage situation vs the Thunderbird.

          • 0 avatar
            CoreyDL

            Yeah, zero RWD Volvos for sale on Cincinnati CL at this moment in time.

            I do have a weekend Volvo story though. I was on 275W headed over to Indiana perched high atop my Tahoe, and in the distance I saw something black and broken on the side of the road, looked like someone had been rear ended but there were no other cars around.

            As I got closer, the situation became more apparent. A gen 1 hardtop C30 which was black/black and looked rather tidy had experienced the back left wheel SNAPPING OFF which took the bumper and half the rear fender with it! They spun off to the right in the grass when it happened. There was a van stopped up the shoulder a ways, but no tow truck or police there yet.

            That’s the end o’ that one.

          • 0 avatar
            NoGoYo

            I’d take the same MPGs if it meant a more practical vehicle. A relatively low 2-door isn’t particularly practical.

          • 0 avatar
            28-Cars-Later

            http://pittsburgh.craigslist.org/pts/5734488587.html

            The key there is, needs lots of work. The nice part of it is, you apparently get two and they are old enough for antique plates which means no inspection. If I had a place to put them…

          • 0 avatar
            NoGoYo

            Well I’d be looking for a 700 or 900 series or a late 240 myself…

          • 0 avatar
            28-Cars-Later

            Ryouku was dealing in those for awhile, I think he bought and sold four in a year. Trouble of course is he’s somewhere in Missouri.

  • avatar
    burgersandbeer

    “…the industry’s updated used vehicle selling practices also helped lower used vehicle depreciation…”

    What does this mean?

  • avatar
    Big Al from Oz

    When these lease vehicles hit the Car Yards it will slow the US new vehicle market quite a bit.

    I’d say it will impact new vehicle manufacture.

    I wonder if some creative finance companies will find a way to keep the current “owners” of lease vehicles from walking away?

Read all comments

Back to TopLeave a Reply

You must be logged in to post a comment.

Recent Comments

  • Scoutdude: I have not seen #2 yet. Looks interesting but it doesn’t really address the total problem. What...
  • APaGttH: Almost $30K for a Corolla if you tick all the boxes…and no more grunt under the hood. $26K to enter...
  • Michael S6: 29 k is GTI money
  • EBFlex: Why does anyone reply to EBFlex? He’s obnoxious, aggressively ignorant, and has never added an ounce of...
  • ToolGuy: Oh hey Peter. “GM is awesome, and Cadillac represents GM at its finest.” Agree or disagree?

New Car Research

Get a Free Dealer Quote

Who We Are

  • Matthew Guy
  • Timothy Cain
  • Adam Tonge
  • Bozi Tatarevic
  • Chris Tonn
  • Corey Lewis
  • Mark Baruth
  • Ronnie Schreiber