If you think it’s easy to tell if a used-car price is too high, guess again. Yes, you can save money by buying a used car, but their prices have been high over the last few years due to two factors: the number of new cars sold and the age of new car trade-ins.
According to Ricky Beggs, editorial director at Black Book, which provides vehicle trade-in valuation for the automotive industry, 60 percent of new-car sales involve some sort of trade-in. The more new cars sold, the greater the number of used cars.
So consider the following: From 1998 through 2007, annual U.S. new car sales never fell much below 16 million units. That changed in 2008, when sales fell to 13.4 million. In 2009, new-car sales plummeted to 10.6 million. Things improved slightly for 2010, when 11.7 million units were sold. Sales have gradually rebounded since then, with 2013 new-car sales breaking the 16 million mark for the first time in six years.
The dearth of new-car sales over the last few years has slowed used-car depreciation, according to Beggs. Prior to the recession, on average, used cars lost between 15 and 18 percent of their value annually. Last year, prices declined by only 12.8 percent, meaning used-car prices didn’t fall as dramatically as they once did. For the coming year, Beggs is forecasting that figure will be 13.5 percent, so prices should be easier to swallow.
But there’s another factor affecting used-car prices: age.
Prior to the recession, the average trade-in was between 2 and 5 years old, according to the folks at Black Book. After the recession, the average trade-in was between 8 and 11 years old. This led to a shortage of late-model used cars and high prices. In the last couple of years, prices for some used models were so high that it was cheaper to buy them new than used.
Given this past year’s brisk sales pace, prices should ease in the coming year. But some segments will depreciate less than others.
For example, don’t expect any bargains if you’re considering a compact pickup truck, such as a Toyota Tacoma, Nissan Frontier, Chevrolet Colorado or GMC Canyon. The Black Book predicts that this segment should have the highest residuals of any segment after 36 months.
Similarly, full-size pickup trucks should hold their value well, said Beggs. “With the economy improving, the service industry picks up, so the need is there. And fuel prices are not hurting that segment.”
Other vehicles that should hold their value well: compact crossover utility vehicles, such as the Honda CR-V, Toyota RAV4, Chevrolet Equinox and Ford Escape; and compact SUVs, such as the Jeep Wrangler and Nissan Xterra. Their popularity stems from their size; despite their category, these vehicles are no longer compact.
However, Beggs is concerned that entry-level cars might depreciate rapidly since all manufacturers – even domestic ones – are rushing to meet stricter federal fuel economy standards. Meanwhile, many midsize cars have been redesigned in the past two or three years and, while they have grown in size, they also have grown in fuel economy. Many models realistically return 38 mpg, which is not much more than a smaller car that returns 40 mpg.
The difference in price, usually about $2,000 according to Beggs, is not enough to prevent buyers from choosing a midsize car over compact or subcompact. “With gas prices at levels that they are, there’s no urgency to get something more fuel efficient,” he said.
As a result, many new subcompact and compact models have huge incentives to stoke buyer interest, which is crimping residual values.
Looking ahead, Beggs predicted that dealers should look forward to another year of 16 million new-car sales. If that prediction holds true, look for used car prices to ease even further over the next year or two.