Prices for used cars are tanking……much to consumers’ benefit. If you are interested in buying a car, it makes sense to consider buying used. Over the past year, the average used car lost 17 percent of its value. The average value of a used car is now $15,300, which is down from $18,400 just a year ago. According to the Bureau of Labor Statistics, used car and truck prices fell 4.6% in April over the past 12 months. It was the only major category with a significant 12-month decline. General Motors Co (GM.N) and Ford Motor Co (F.N) say prices for its used vehicles, which consist largely of nearly-new ones coming off lease to consumers, fell 7 percent in the first quarter versus the same period in 2016. GM says it expects a 7 percent decline for 2017 compared to last year. And financial analysis firm Morgan Stanley predicts used car prices could crash by up to 50% over the next 4-5 years. Now is the time to buy a used car…..with one important exception! (we’ll get to that at the end)
So why have used car prices tanked? Here are some of the reasons cited by industry analysts:
- Used car supply has more than doubled since 2012 and is set to rise another 25% over the next 2 years. By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales.
- Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation. Too much consumer debt out there means fewer loans are being given for used cars…..and thus fewer cars are being snatched up by cash-starved consumers.
- The 2014-2016 new car boom: So many new cars were bought in the last five years, as a result of post-recession pent-up demand, that the used car inventories soared.
- Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle’s peak.
- Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.
- Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.
- OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money ‘on the hood’ to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.
- Buyer tastes have changed: Over the last three years, buyers want SUVs or crossover cars. Back in 2014, the marketplace was much more heavily tilted toward passenger cars than it is today.
- Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.
So there are some great deals you can get on used cars right now. If you’re looking for something entry-level and modern, you can get a dirt cheap used subcompact like a Ford Fiesta or Honda Fit. Need a family hauler, but don’t want a soulless crossover? Consider a gently used full-size sedan like a Chevy Impala or Nissan Maxima. However, if you’re trying to get rid of your recently purchased car, however… consider Craigslist rather than trading it in, as dealer inventories are flooded with used cars.
Finally, here’s the exception. As a result of the flooding caused by Hurricane Harvey and the potential damage caused by Hurricane Irma (which is zeroed in on Florida, as we talk), you’ll likely NOT want to buy cars being sold in the South. Flooding wrecked up to 1 million cars in Houston. Many of these cars will be dried out, detailed and then placed on the used car market. Beware — these cars could be major lemons. So, if you buy a used car in the coming months, it is essential that you use a vehicle history report, such as VINCheck, a free database that allows prospective car buyers to check a vehicle identification number for flood or accident damage as well as whether it has been reported stolen. Other vehicle databases include CARFAX, Autocheck and the National Insurance Crime Bureau (NICB) and VehicleHistory.com, the latter which is free. They typically report where the car was purchased, where and when any accidents where an insurance claim has been made, in addition to the registrations by state and the type of title for the car. If they were in Texas or Florida, beware!