Used Car Prices are Seeing a Downfall

The market is seeing an improvement in credit conditions and this is likely to move in the upward direction even in the coming year. Looking at the market conditions, used-car auction giant Manheim predicted that the environment is conducive for sustained vitality in the new, used and even salvage (markets. These and other trends were explored in the Manheim's 19th annual Used Car Market Report that was released in January 2014 at the National Automobile Dealers Association (NADA) convention.

According to the latest data from auto dealers, it is predicted that the demand for pre-owned vehicles would remain strong. Tom Webb, Chief Economist with Manheim Consulting said, "From a dealer standpoint, the environment right now is very good." Even luxury crossover like Black BMW X3 3.0 are also finding their place in the used car segment.

Strong sale record

There has been an increase in the used car sales, primarily because of the noticeable improvements in the economy. As a result, a wider array of options was given to buyers. This trend by the banks and auto dealers alone gave an impetus to the sales pattern and banks are now writing auto loans to many buyers. This year it is expected that the used vehicle sales would reach 16 million. This is based on the fact that franchised dealers sold 15.6 million used vehicles last year. Along with the availability of more credit, the used vehicle loan rates are also likely to be stable and reasonable. Though the sales records are good, the price graph is moving downwards.

Lower prices

Economists at the National Automobile Dealers Association (NADA) recently announced that the used cars would get cheaper in 2014. Since the last five years the prices have been consistently rising, but this year they have hit a speed brake. Analyzing the trend, researchers at NADA say that this is not a sign of a bursting bubble. From 2007 to 2013, the average used car price rose by 18 percent. This was because the cash-strapped buyers were inclined more towards buying a used vehicle than new ones. However, the present scenario has changed. The prices of the used cars are approximately 10 percent higher than the average prices that were prevalent in the past couple of decades. Banks have said that the price rise of used cars may be very normal now. This is because with the collapse of new car sales in 2008-09, the car supply remains depressed.

Even the analysts at Edmunds expect the average price of used cars to fall. As the consumers are recovering from a financial slowdown, people are ready for a change. In the past, they held onto their vehicles due to the financial crunch. However, now they are trading their cars - selling their old cars or wanting to upgrade to a new vehicle. Moreover there has been an increase in the inventory of used cars due to lease returns. This has led to the drop in prices. Although the present fall drop is just 2 percent, this could have a ripple effect. Joe Spina, Edmunds director of remarketing says, "This would help in shifting the buying power to the consumer."

Effects of new-car leasing

About a quarter of all cars were leased last year. Most of them come to the used car market when their lease gets over. These vehicles would pass through various auctions and dealers around the country. Unlike the present scenario, fewer cars were sold or leased in 2010 and 2011; possibly because many of them were recovering from the brunt of the recession. Leases accounted for just 19 percent of retail new-vehicle sales in 2010 and 20 percent in 2011. However as the economy improved more new cars started to sell.

New-vehicle sales in the U.S. were up 13 percent in 2012 and it further went up by 7.6 percent last year. This indicated that the used cars market would also get new entrants very soon.

The stronger prices of used cars are making the leases on new cars also cheaper. Lease prices are estimated according to their residual values. This value is an estimate of what would be the value of the new car at the end of lease. Market segments like luxury sedans can feel the maximum impact. This is the possible reason why General Motors has taken prominent initiatives to improve its residual values. For this, the company is limiting discounts on its new cars. This is a great advantage for the buyers.

Benefit to automakers and consumers

With this trend the automakers are trying to cash in on the advantage. One area that they are looking at is certified used cars. Automakers are gearing up to create action in the used cars market, which would be offered as 'certified' with an extended warranty. This would be a win-win situation for automakers and buyers. For carmakers, this could be a way to balance out losses as the dealers pay automakers to participate in the car certification program. At the same time, these certification programs would make buyers less anxious.

The testament to the popularity of these cars is the fact that last year around 2.1 million certified pre-owned (CPO) vehicles were sold last year by auto dealers. This sales figure is expected to reach 4 million this year, according to Manheim. Online auction sites have also contributed to the increased sales in their own way. With the convenience to register and bid , customers prefer these sites for their automobile purchases.

In any case, the whole scenario is bent in favor of the buyers. They would be getting more options from a wide range of used cars.