Used-Car Prices Will Fall, but Gradually
McLEAN, Va. -- Is a sharp correction in used-vehicle prices imminent? The National Automobile Dealers Association expects used-vehicle prices will indeed begin to fall -- gradually.
After the Great Recession, a sharp decrease in new-vehicle sales greatly reduced the supply of late-model used vehicles. At the same time, price-conscious consumers chose to buy more affordable used vehicles than new cars and trucks. These two factors helped lift used-vehicle prices by 17% from 2007 to 2013, according to the NADA. Prices have risen another 2% so far this year to an all-time high of $16,560.
Now, an improving economy and increased employment have brought new-vehicle sales back up to pre-recession levels, which in turn has increased the supply of late-model used vehicles, said NADA economist Jonathan Banks. Ultimately the additional volume of used vehicles and an increasingly competitive new-vehicle market -- both in terms of pricing and consumer demand -- will decrease used-vehicle prices.
There are many reasons why such a correction in used-vehicle prices will happen gradually, Banks said. First, while the supply of used-vehicles is growing, it’s occurring at a steady pace. This means that associated pressure will also come into play incrementally and not in one massive wave.
Second, economic growth and an improving employment situation will unlock demand among both new- and used-vehicle buyers. Consumers’ stronger financial positions will continue and cause them to return to the new-vehicle market. But it will also support demand for used vehicles, particularly among hourly-wage and part-time workers.
Third, the used-car landscape is dramatically different than in 2007. Dealerships have bolstered the used-vehicle world with increased staff, advertising, software and infrastructure, all designed to make the used-vehicle department as much a part of their businesses as the new-vehicle department.
All these factors greatly reduce the likelihood of a collapse in used-vehicle prices. The current level of incentive spending is as high as it’s been since 2010. NADA expects used-vehicle prices to finish the year roughly on par with 2013, before dropping 3.5% to 4% in 2015 and 2016.
SOURCE: National Automobile Dealers Association.
Published by The Business Journal, Youngstown, Ohio.
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