Used-Car Prices Expected To Drop

Although used-car prices have increased since the U.S. recession, the incline is expected to halt this year as lessees turn in a large amount of vehicles. Older models will become more readily available, increasing the market’s supply of such vehicles.

“Used car sales have been dramatically improving since the recession,” Jonathan Banks, executive automotive analyst for the National Automobile Dealers Association Used Car Guide (NADA) said at this year’s convention in New Orleans. NADA provides new and used car prices to consumers, businesses and associations. Since the early 1900s, NADA has been building the largest available database of vehicle transactions.

New cars that were leased two to three years ago are ready to be turned back in, giving many dealers a new supply of cars ready to be sold. Manheim, an auto-auction company owned by Cox Enterprises Inc., estimates that room will be made for 2.1 million vehicles arriving back at dealerships. This number is expected to grow to 2.5 million in 2015 and then to 3 million in 2016.

The industry may need to refine its marketing processes to make way for off-lease volumes. Some analysts are worried off-lease units won’t be exposed to every potential buyer, a crucial move for dealerships. Manheim warned dealers of the dangers that may rise with taking in off-lease vehicles on behalf of lessors.

This dramatic increase in supplies is bound in lower prices, which is good for those looking to buy a used vehicle, but it decreases the trade-in value for those looking to buy a new car. Used-car prices are expected to drop about 1 percent, Banks said. Over the past several years, used-car prices have remained at historical highs, supporting new-car sales due to high trade-in values.

Trade-in values for models made in 2005 to 2013 dropped an average of 15.9 percent in 2013, a decrease from 2012’s average of 16.1 percent. In 2013, car values dropped by 17.6 percent, while truck values dropped by 13.5 percent. Large pickups and mid-size pickups had the smallest annual change in trade-in values.

According to Banks, used-car prices increased 18 percent from 2007 through 2013. Last year, U.S. consumers paid an average of $14,685. About 42 million used-car units were sold, which is nearly three times as many new cars sold. Selling a used car can leave dealers with up to three times the profit of a new-car sale.

Consumers who are now fully recovered from the recession are expected to replace aging vehicles, creating a high demand for both used and new vehicles. Banks said the average age of vehicles on the road today is 11.4 years old. While employment and readily-available credit are increasing, consumers are gaining more confidence that buying an additional, newer vehicle is a realistic option.

Sales hit rock bottom in 2009, when only 35.5 million used-car units were sold. Since then, sales grew an average of 4 percent from 2010 to 2013. NADA has found through studies that the demand for used and new vehicles have been increasing together, which is a new trend in comparison to historical demands.

Manufacturer Certified Pre-Owned (CPO) sales grew by 15.3 percent in 2013, reaching 2.11 million units. This is the highest annual increase since 2003. CPO sales accounted for about 13.5 percent of franchised dealer sales in 2013. In 2003, the CPO market was less than 40 percent of the size of the off-lease volume, but today’s market can handle a much larger amount of off-lease vehicles.

Analysts are anticipating the prices of large SUVs and pickup trucks to increase this year due to gas prices becoming more affordable in comparison to prior years. Gas-guzzling vehicles are now a more reasonable means of transportation, where fuel efficiency used to be top priority. According to the U.S. Energy Information Administration, the projected average retail price of regular-grade gas throughout the remainder of 2014 is $3.44 per gallon. The projected price of gasoline in 2015 is $3.36 per gallon.

Another contributing factor to the used-car price change is the federal Cash for Clunkers program, which decreased the supply of old cars. Federal funding of the program is now depleted, but many local private buyers are providing cash for cars of various makes and models. The program does not require consumers to purchase a new vehicle in order to get rid of an old vehicle, a major difference from the original CARS program.

Some analysts who examine used-car trends are predicting a collapse in used-car prices, which would bring them closer to historical prices. “We don’t believe there is correction. In fact, we’ve seen prices improve based on fundamentals — not based on psychological changes in demand like we saw with the housing bubble or the Internet bubble,” Banks said at the convention.

About 1.6 million units of new vehicles were sold to rental companies in 2013, an increase of 1 percent, according to Bobit Business Media. Although it was the largest amount since 2007, it’s still not close to the 2.1 million units sold to rental fleets from 2005 to 2006.

NADA forecasts that 16.4 million new cars and light trucks will be sold or leased in the U.S. this year, which would be a 6 percent increase.

The 2014 convention closed with a keynote from Hilary Rodham Clinton, who discussed how a strong auto industry could positively impact communities nationwide. “Building and selling cars, in large part, created the middle class,” Clinton said, “We are still the indispensable nation. We just have to do what every generation has had to do: step up.”

Next year’s NADA convention will be held Thursday through Sunday, Jan. 22 through 25 in San Francisco.