Used-Car Prices Dropping, Not Crashing

LAS VEGAS – A drop in used-car prices doesn’t mean they’ll crash and burn, say automotive remarketing experts at a conference here.

Chatter of a potential crisis in the pre-owned vehicle market is exaggerated, says Jonathan Banks, a senior analyst for the National Automobile Dealers Assn. “We’re talking about a soft landing, not a collapse like housing prices dropping 35% during the recession,” he says. “But people will be paying lower prices for used cars.”

It ends what was quite a run. Used-car prices increased 20% since 2007. It was the same old story: high demand meets low supply.

Demand rose during and after the recession as many consumers, who ordinarily would have bought a new car, instead opted to pay less for a pre-owned vehicle. Blame tighter personal finances for that shift in buying behavior.

Meanwhile, used-car supplies had been relatively low as of recently because of the recessionary drop in new-car sales, especially in 2008 and 2009. That meant fewer future used cars. Now, the industry is seeing an opposite effect from new-car sales increasing in recent years.

“The recession brought bad things but it was good for the used-car market,” Banks says at the 2014 National Remarketing Conference here.

Used-car supplies increased 6% in the past year, “so we’ll see a softening of prices, but it won’t be traumatic,” says Eric Lyman, a vice president at residual forecasterALG.

More two- and three-year-old vehicles are coming off lease, “so that obviously will affect used-car prices,” he says.

So too will an increase in automakers’ incentives, he says. “They’re getting highly competitive.”

Eric Ibara, Kelley Blue Book’s director-residual value consulting, agrees. “Customer cash will have the most immediate impact. No one knows where it will go from here.”

Banks says, “We’re moving back to old patterns, with leasing incentives and some cash on the hood. If payments are low enough, we’ll see customers, who really should be in a used car, instead buy a new car.”

Generally, new-car incentives hurt used-car prices, he says.

Expect automakers to sweeten new-car lease deals, says Ricky Beggs, senior vice president at Black Book residual tracker.

NADA predicts light-vehicle sales of nearly 17 million units next year.

“New-car sales are almost back to pre-recession levels,” Beggs says. “But nothing says used-car depreciations will fall off the table in 2015 and 2016.”

Pre-owned vehicle demand will increase in 2016 and 2017, Lyman predicts, citing factors such as population growth and more Millennials entering the market.


S.A. StevensonUsed-Car Prices Dropping, Not Crashing

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