How much is your car worth?
Probably less than you think. Car sales have been booming – rising for the past seven years, ever since the Great Recession. They’re almost as high as they’ve ever been. But with so many new cars rolling off of dealer lots, the market for used cars is glutted. That’s putting downward pressure on the price of used cars. In fact, the average used car lost 17% of its value in the past 12 months, significantly more than just a few years ago. In 2014, the average used car lost only 10% of its value.
These used cars are coming off of record lease volumes. Consumers can’t afford the $70 thousand or so it costs to buy a new Suburban or Expedition, so they lease one for $600 per month. The car-makers have been piling on the incentives to maintain the pace of new car sales. But this means a record number of drivers are upside down on their car loans.
Not surprisingly, defaults and repossessions are on the rise. Auction yards are seeing a rising number of repossessions and sales. Ironically, the buyer’s market in used vehicles may be putting a dent in new car sales. That means the recent modest down-tick in new vehicle sales that some folks have been fretting about may not be a sign of consumer weakness, but a normal, self-correcting supply side adjustment.
Source: St. Louis Fed
A 3-year old car is now worth less than two-thirds of its original sticker price. This may put pressure on rental car companies, like Avis, whose profits plunged as they struggled to sell vehicles they weren’t using. But for ordinary consumers, lower used car prices are a gift. A cheap used car hasn’t been this cheap in a long time.
Douglas R. Tengdin, CFA