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)]