It’s a common joke that winking at an auto auctioneer can get you into trouble. I found plenty of trouble recently thanks to my winking, as I am now the terrified owner of a small army of Smart Fortwo city cars. These cars have less than 12,000 miles on their odometers, are equipped with heated leather seats and upgraded sound systems, and are still fully covered by Mercedes-Benz’s four-year/50,000-mile factory warranty. At $4000 for a 2014 model and $4900 for a 2015 model, the Smarts weren’t so much bought as they were legally stolen. Although it’s a bit nerve-racking to own so many of them, to me these cars represent the rolling embodiment of opportunity in today’s used-car market.
When it comes to used cars, it pays to study the recent past to help understand the present. The Smart Fortwo, for example, has not sold well in the past few years. Last year, U.S. sales fell 17 percent to a mere 6211 units. That comes after sales plummeted 28 percent in 2016 to 7484 units. Parent company Daimler has decided that it will no longer sell the gasoline-powered model in North America but only the Fortwo Electric Drive.
Smarts are now sitting en masse at wholesale dealer auctions around the country along with a multitude of other subcompact and compact vehicles. Last year, I picked up a 2015 Ford Focus SE hatchback with 20,000 miles for only $9000. There were thousands of one-year-old Chevrolet Cruzes, Dodge Darts, and other compacts that sold for even less money. Consider that the next time you want to finance or lease a 2017 model.
Small cars are getting creamed these days, and they are not the only ones. Large sedans have struggled to sell, too. Americans are flocking toward crossovers and SUVs in the wake of lower fuel prices. Add to this the fact that vehicles in general are expected to depreciate faster this year.
These are the four major factors that drive depreciation:
1. The Too-Cheap Lease
Back in 2014, you could get a Nissan Leaf for $199 a month with $2000 down. That turned out to be too low in the long run. Sales cratered by more than 50 percent by 2016, and residual values for off-lease Leafs got clobbered. The Leaf is just one of dozens of cars that fell out of favor from 2014 to today. Even if you’re not buying cars by the dozens the way I am, it’s incredibly easy to figure out where the used-car deals are. Just Google “2014 lease deals,” find those models that interest you the most, and then go here to see how their sales went over the last three years. If the sales declined by double digits, you can be assured that there is still a big surplus of supply and a lack of current demand. Some 2015 models are also fair game, since a lot of folks still do 24-month leases.
2. Lame Ducks
Nothing hurts a used car more than having an old body style or being equipped with undesirable options. I could have bought a new Honda Accord for $15,000 back in 2013, thanks to a nearby dealer who was stuck with two stick-shift base models that had been on his lot since early 2012. Eight months later, I saw an identical version of one of those cars sell at a dealer auction for only $10,000. Stick-shift versions of non-sporty cars always get hit hard, and so do models that look dated due to a new generation that’s already out.
3. Two Steps to the Left
Gas prices have a huge impact on used-car demand. When gas prices are low, most folks who trade in their cars will take what we in the business call two steps to the left and buy a slightly larger or less fuel-efficient vehicle. Since gas is now cheaper than it was in early 2014, that former hybrid buyer may go for a compact crossover, like a Honda HR-V, that can offer them 34 mpg on the highway instead of 53 mpg like the current Toyota Prius. Many former Toyota Camry and Accord owners “get stilts” and shop for a larger Camry- or Accord-like vehicle that sits a little taller, such as a mid-size crossover or a compact SUV. Thus, mid-size and smaller cars are cheaper now, but if oil ever climbs back to $100 a barrel, you’ll see the exact opposite behavior take place.
4. Rental-Car Hell
Some models won’t die; they just continue to be produced in near perpetuity for rental-car franchises. The Dodge Grand Caravan is now in its 10th model year, and the previous Chevrolet Impala lasted 11 long years. If you reserved a subcompact rental car but are handed the keys to a minivan or a mid-size car, you now have a pretty good idea of what the local dealers around you can’t sell anymore.
So let’s revisit those Smart Fortwos and see how they measure up. Back in 2015, Mercedes was offering a $99 lease with just under $1400 down for a 2015 Smart. That deal, sadly, stretched all the way back to 2012 because the tiny Smart was always a tough sell even when gas prices were high. Sales after 2014 still declined by well over 35 percent. The 2014 and 2015 models were the last two years of the old body style, and Mercedes tried to pawn off the remaining cars, like the ones I ended up buying, as rental-car fodder but found few takers. That’s how a two-to-three-year-old car can lose two-thirds of its value, even with low miles.
Here’s the deal: In the used-car market, the past and the present will always work in tandem to create what will become buying opportunities for those who want to hit ’em where they ain’t—and save thousands doing so.
Steven Lang has been an auto auctioneer, car dealer, and part owner of an auto auction for nearly two decades.
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