Damn: Used Cars Are Getting More Expensive

Matt Posky
by Matt Posky
damn used cars are getting more expensive

Ever since the end of the recession, new car prices have crept up steadily while used vehicle values remained comparably low. In fact, compact cars actually became less expensive between 2013 and 2017 as the crossover craze left a glut of small, economical vehicles that could be purchased for little more than a smile.

Unfortunately, the tide is turning. A sudden influx of end-of-lease vehicles was supposed to continue suppressing used vehicle prices for 2018. However, things have not played out that way. Despite there being so many gently used vehicles saturating dealer lots, average used-vehicle prices reached $20,153 in the second quarter of this year — making it the first time the market has ever broken the $20K threshold. According to research firm Edmunds, the 3.3-percent increase over 2017’s second quarter was also a record.

Normally, a surplus of used vehicles helps keep prices down. But the popularity of utility vehicles and the proliferation of advanced tech has begun to seriously affect the secondary auto market. Five years ago, cars made up about 50 percent of United States’ new-car sales. But trucks and SUVs have since taken the majority of the industry’s volume, appearing on used lots en masse. That shift also forced up new vehicle transactions. In December, the average price of a new automobile in the U.S. reached $36,848 — an all-time high.

“Customers forget a new car is now more than $30,000 and they expect it to be $20,000,” Brian Allan, a senior director at Galpin Motors Inc. in Southern California, told The Wall Street Journal. “When people see the price has gone up, it is sticker shock, especially when people only buy a car every five to six years.”

That sticker shock forced some buyers back into the used market, pushing demand through the roof and allowing dealerships to charge more. This is further helped by dealerships having more access to off-lease crossovers and pickups, the kind of vehicles the average consumer is interested in buying.

From The Wall Street Journal:

As new car prices have climbed, auto lenders have kept monthly payments low by extending loan-repayment terms to five and six years and introducing [zero-percent] financing on loans that made buying new a more attractive deal.

But as interest rates rise and credit tightens, auto companies are pulling back on such sales incentives. The average monthly payment on a new car was $536 in August, up from $507 last year and $463 five years ago, according to Edmunds.com.

“In the past, I entertained new because you could get a [zero-percent] interest rate for 60 months,” said everyman Justin Scholz, who was recently considering a new Lexus RX Hybrid for $66,000. “New was a small premium compared to used. Now, the gap is much bigger.”

Scholz ultimately looked deeper into the used vehicle market, where he found a two-year-old version of the Lexus he wanted with only 30,000 miles on the odometer. It was more than $20,000 cheaper than the new vehicle, making the final decision relatively easy for him.

For the second quarter of 2018, the average transaction price for a three-year-old vehicle is $22,489. Meanwhile, the price of a new car was $35,828. The returns dealerships see on used vehicles has also gone up slightly, now sitting at 7 percent — over double the return of the average new-vehicle sale.

As for the future, demand isn’t expected to increase in the used market any time soon, but prices should continue to climb. Analyst projections for total used-vehicle sales for 2018 are about 38.5 million units, with no growth expected for 2019. However, as off-lease crossovers and trucks continue making their way back onto the second-hand market, used values aren’t likely to go down.

There’s also the matter of stagnating wages. Hourly income has increased as the economy turned around, but inflation appears to be outpacing income ever so slightly. Meanwhile, deprecation on the used market has slowed and anticipated demand has risen — helped in part by last year’s hurricanes.

While the price increase in the used market sounds unsettling, you’re still getting a sweet bargain by purchasing used. The gap between first- and second-hand vehicles continues to grow. Used values are simply reflecting the steadily inflating MSRP of showroom-fresh vehicles.

[Image: Steve Snodgrass/ Flickr ( CC BY 2.0)]

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3 of 62 comments
  • 87 Morgan 87 Morgan on Sep 25, 2018

    I think an argument can be made that natural disaster is helping in part to either increase or at the least maintain the current used vehicle pricing. Anymore it seems we can rely on some area of the country being completely wiped out with flooding and what not. These events put people back into the market prematurely with little time to shop, while also requiring the local dealers to essentially do the same thing in bulk on the wholesale market. These events are a boon for the poorly run stores that have stale or aged inventory to off load front row ready product to someone who is desperate.

  • Speedlaw Speedlaw on Sep 26, 2018

    This question also depends on your personal use curve. There are folks who buy as fashion then at year four get bored. If you are not able to fix a few simple things the perceived cost goes way up. I keep forever and believe buy once cry once. My new BMW lasted 13 years. My Acura is 11 and still going. I will be replacing the Caddy shortly with another new car because the Cad is falling apart. I bought it used but it has not been a bargain. If you buy and keep a new car it makes sense

    • You just described most enthusiasts. I, and most everyone else I know get bored after 3-4 years with a car unless you're putting serious work into it or it's a rare, special piece. $5-7k worth of required and scheduled maintenance is a tough sell when you're already tired of the car. Hence people swap out to a new shiny toy.

  • Max So GM will be making TESLAS in the future. YEA They really shouldn’t be taking cues from Elon musk. Tesla is just about to be over.
  • Malcolm It's not that commenters attack Tesla, musk has brought it on the company. The delivery of the first semi was half loaded in 70 degree weather hauling potato chips for frito lay. No company underutilizes their loads like this. Musk shouted at the world "look at us". Freightliners e-cascads has been delivering loads for 6-8 months before Tesla delivered one semi. What commenters are asking "What's the actual usable range when in say Leadville when its blowing snow and -20F outside with a full trailer?
  • Funky D I despise Google for a whole host of reasons. So why on earth would I willing spend a large amount of $ on a car that will force Google spyware on me.The only connectivity to the world I will put up with is through my phone, which at least gives me the option of turning it off or disconnecting it from the car should I choose to.No CarPlay, no sale.
  • William I think it's important to understand the factors that made GM as big as it once was and would like to be today. Let's roll back to 1965, or even before that. GM was the biggest of the Big Three. It's main competition was Ford and Chrysler, as well as it's own 5 brands competing with themselves. The import competition was all but non existent. Volkswagen was the most popular imported cars at the time. So GM had its successful 5 brands, and very little competition compared to today's market. GM was big, huge in fact. It was diversified into many other lines of business, from trains to information data processing (EDS). Again GM was huge. But being huge didn't make it better. There are many examples of GM not building the best cars they could, it's no surprise that they were building cars to maximize their profits, not to be the best built cars on the road, the closest brand to achieve that status was Cadillac. Anyone who owned a Cadillac knew it could have been a much higher level of quality than it was. It had a higher level of engineering and design features compared to it's competition. But as my Godfather used to say "how good is good?" Being as good as your competitors, isn't being as good as you could be. So, today GM does not hold 50% of the automotive market as it once did, and because of a multitude of reasons it never will again. No matter how much it improves it's quality, market value and dealer network, based on competition alone it can't have a 50% market share again. It has only 3 of its original 5 brands, and there are too many strong competitors taking pieces of the market share. So that says it's playing in a different game, therfore there's a whole new normal to use as a baseline than before. GM has to continue downsizing to fit into today's market. It can still be big, but in a different game and scale. The new normal will never be the same scale it once was as compared to the now "worlds" automotive industry. Just like how the US railroad industry had to reinvent its self to meet the changing transportation industry, and IBM has had to reinvent its self to play in the ever changing Information Technology industry it finds it's self in. IBM was once the industry leader, now it has to scale it's self down to remain in the industry it created. GM is in the same place that the railroads, IBM and other big companies like AT&T and Standard Oil have found themselves in. It seems like being the industry leader is always followed by having to reinvent it's self to just remain viable. It's part of the business cycle. GM, it's time you accept your fate, not dead, but not huge either.
  • Tassos The Euro spec Taurus is the US spec Ford FUSION.Very few buyers care to see it here. FOrd has stopped making the Fusion long agoWake us when you have some interesting news to report.