Wednesday, 1 February 2017

The Good News: It’s a Buyer’s Market for Used Vehicles; The Bad News: Your Car Is Depreciating Faster

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Shopping for a car isn’t like looking for a new pair of shoes or even a smartphone. Rookie car buyers enter the dealership with only vague notions that they need a new set of wheels and how much they can pay per month. They’re ripe marks for a sales pitch that sees many people driving away in a new car from the first dealership they visit. The showroom floor isn’t the place to start your quest for a new car. Smart shoppers start with hours of online research at sites like Car and Driver’s Buyer’s Guide, where you can learn what’s available, compare costs and features, and read expert reviews and road tests and estimate financing costs. Most dealerships have internet sales departments that allow cross-shopping to compare what’s available and even negotiate prices before ever setting foot in their parking lot.

What’s to be done with all the used cars and trucks? The question was at the forefront of the 2017 National Automobile Dealers Association convention in New Orleans. Of concern for car and truck dealers is the glut of vehicles coming off leases this year, which will inevitably drive down prices for used vehicles. Their loss could be used-car buyers’ gain.

“I think from [the automaker’s] perspective, that’s bad news,” Toyota Motor North America CEO Jim Lentz said at a roundtable with journalists Sunday. “From the consumer’s perspective, it’s pretty good news. There are going to be some great deals out there on certified used passenger cars.”

The key word there is “certified.” Dealers and manufacturers alike are poised to woo customers toward certified pre-owned vehicles, or CPOs, which have low mileage and come with a manufacturer-backed inspection, a warranty, and other perks. The push makes sense, as most cars and trucks coming off leases will be newer, and CPOs typically cannot be more than five or six years old.

The supply of used vehicles up to five years in age on the market already grew by 13 percent in 2016, led by a 33 percent rise in off-lease maturities, according to data from the research firm J.D. Power, which was shown during a session at the NADA convention. Another 6 percent increase in used-vehicle volume is forecast for this year. For car and truck shoppers, that growth in volume points toward a buyer’s market for used vehicles. On the flip side, if you own a car or truck, it is likely to lose its value faster in 2017.

In 2016, wholesale used-vehicle prices went down for the first time since the last recession, dropping 4 percent, according to J.D. Power, and the slide is expected to continue this year. At the same time, average incentive spending on new vehicles—or the amount automakers spend on cutting deals with consumers to boost sales—hit an all-time high of $4001 last year. J.D. Power data says incentives are expected to continue to grow this year.

“What that means, from a consumer standpoint, is that your new vehicle depreciates faster,” said Jonathan Banks, vice president of J.D. Power’s valuation services.

Cars and trucks already had an acceleration in depreciation last year, according to J.D. Power figures. Every segment depreciated by double digits, save for large trucks, which had their value drop by 8 percent. “Trucks are still doing amazingly well,” Banks said, adding, however, that a continued increase in used-truck supply could hit prices there as well.

In 2017, J.D. Power expects the deprecation rate in cars to increase from 20 percent to 21 percent, and in trucks to rise from 14 percent to 18 percent.

“The higher incentives on the new vehicles, the lower that transaction price is for the new vehicles,” Banks said. “That puts downward pressure on used [vehicle prices].”

Meanwhile, with more used cars and trucks coming on the market, and used-car prices falling accordingly, some automakers may have to spend even more on incentives to get people into new vehicles.

“You get kind of a vicious circle between the two, which could be really bad, especially when you’re spending a lot of money,” Banks said. “So it’s a bit of a frightening situation, in my opinion.”

Dealers do not seem to be panicking, and some told C/D anecdotally that downward pressure on used car and truck prices has not yet been too abrupt at the dealer-lot level.

Michelle Primm, general manager of the Cascade Auto Group in Cuyahoga Falls, Ohio, said the further decline in used-vehicle prices will likely mean a greater focus on sales of certified pre-owned vehicles, where the dealer can draw more value.

“We’ll adjust to market habits,” Primm said. “Car dealers are nimble.”

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