Used-car prices up and staying strong
Seemingly contrary to what you might expect in a soft retail market, used-car prices continue their upward push, with used-truck prices also gaining strength.
The trade publication Automotive News reports that in February 2010, the average wholesale price of a car was up 6 percent from February 2009 and up 4 percent from January 2010.
Used-truck wholesale prices were 11 percent higher than last year, and 2 percent higher than the previous month. Full-size vans and big SUVs led the charge with 33 percent and 11 percent year-over-year increases respectively. The luxury segment was up 18 percent year over year.
A used car that would have wholesaled at an average of $8,502 in February of 2009, cost $9,032 a year later. The wholesale price of a truck went from $10,265 to $11,393 during that same period. As with any product, higher wholesale prices translate into higher retail prices for the consumer.
If you are in the market for a used vehicle, you might wonder whether it makes more sense to buy now or wait, hoping prices go down.
To answer that, you need to understand what is driving this upward pressure in used-vehicle wholesale prices and if we can expect it to continue.
Tom Webb, chief economist at Manheim, in Atlanta, which specializes in the wholesale used-vehicle market and operates auctions for dealers, says, “I would expect prices to remain high.”
It’s simply a result of supply and demand, Webb says. Used vehicles arrive in the marketplace and onto dealer lots through a variety of sources:
- Vehicles traded in on the purchase of a new one, the most common way.
- Rental fleets rotating their stock.
- Vehicles turned in after a lease.
- Repossessed vehicles.
Webb explains that as new-vehicle retail sales continue to increase, the number of trade-ins also grows. At the same time, however, rental fleets are keeping their vehicles longer and repossessions will be trending downward — both factors keeping the supply of used cars down. Moreover, as the economy improves, he says, “Used-vehicle sales demand is also increasing.”
Providing used-vehicle valuation data through its Used Car Guides since 1933, NADA, or the National Automobile Dealers Association, agrees with Webb’s projection, stating that manufacturers are constraining the supply of new vehicles by limiting production — thereby also influencing the supply and price of used cars.
Carmakers have dramatically dialed back production. For years, an oversupply of new vehicles encouraged large incentives to motivate consumers to buy. Lowering transaction prices through incentives and other discounting schemes also depressed used-vehicle prices. During the latest economic downturn, manufacturers have curbed production and reduced supply.
Automotive News reports that on March, 1 2008, there were a total of 3,463,000 new vehicles on dealer lots or in the distribution pipeline. On March 1, 2010, that number was down to 2,165,000 vehicles — a more than 37 percent inventory reduction. Smaller supply helps keep prices up.
According to Webb, dealer incentives remain the one wild card. Despite carmakers doing a better job controlling inventory, an incentive war could drive retail prices, and then used-vehicle prices, down. “If incentives actually become out of control,” he says, “it would depress used-vehicle prices.”
Webb sees that as unlikely, though. He believes as the economy slowly rebounds, new-vehicle sales and production will follow. Save an abrupt change, the upward trend of new-vehicle sales shouldn’t affect the strength of used-vehicle prices. “I lean toward the gradual side,” he says. “There will be a healthy increase (in new-vehicle sales) this year, but it will be below normal trends.”
NADA recently estimated total new-vehicle sales in 2010 at 11.5 million units. This is a 1.1 million unit increase over sales in 2009.
Even if new-vehicle sales this year exceed all expectations, Webb doesn’t think it will work to dampen used-vehicle prices. As long as sales growth isn’t achieved through gimmicks or incentives, used-vehicle prices should remain strong. “If you were selling 14 million new vehicles into a market that only wanted 10 million, that would depress (used-vehicle) prices. But if you sold 14 million into a real 14-million market, used-vehicle prices would remain strong.”
The bottom line: Consumers hoping for a drop in used-vehicle prices should brace themselves for disappointment. The good news: If you are selling or trading in a vehicle, you may get more for it than you expect.