Why are used car prices going up?
Used car prices vary according to supply and demand, but there are other factors in play as well. For example, when car makers put large financial incentives on new leased vehicles and the incentives work to increase lease sales that actually decreases the vehicle’s residual value at the end of the lease. In other words, two or three years down the road as the vehicles come off lease, the used car market is flooded with those same off-lease vehicles. The increase in the number of used cars coming off lease increases the supply which should actually lower used car prices.
The leasing companies must take that into account on the front end. Since the lease price is calculated but subtracting the residual value (car’s worth at the end of the lease) from the sale price, the result is actually a HIGHER lease rate.
Lease rates have been low but that’s changing
Until 2019, the combination of low interest rates, easy credit availability, higher job growth and tax cut package managed to keep the depreciation rate for used vehicles at around 12.4% in 2018. The rate in 2017 was 13.2% versus 17.3% 2016. However, Black Book, the data expect in the leasing/used car industry, sees the depreciation rate growing in 2019. In fact, on 2-to-6-year-old vehicles, Black Book expects depreciation to grow to 15%. Again, a higher depreciation rate increases the lease price but lowers the price of used cars.
Car companies combat higher lease rates with incentives
The best way to combat higher lease rates due to lower residual values is to boost incentives. But on which vehicles? Crossovers, SUVs and trucks are the vehicles of choice right now, so car makers place their incentives on those vehicles. However, higher incentive discounts work hand-in-hand to drive down the residual value of those leased vehicles. It’s a cause-and-effect game.
Sedans, on, the other hand, receive fewer incentives, which reduces the number of sales. So fewer are sold and they fetch a higher price. Because they cost more, they sell for more on the used car lot.
Demand for used cars is rising
During the recession, buyers put off buying a new vehicle. That’s reached its natural limit and buyers are now in the market to replace those old vehicles. With increased residual values upping the price of leased crossovers, SUVs and trucks, we’re seeing higher used truck and SUV prices on the used car lot. Those vehicles tend to fetch about a 5% premium over sedans. However, since sedans are generally lowered priced to begin with, they’re in demand by buyers looking for less expensive transportation.
All factors combine to raise used car prices
Whether the supply of used cars is coming from off-lease crossovers, SUVs or trucks or retail sales of sedans, the increase in depreciation coupled with increased demand is resulting in higher used car prices.
The only factors that could alleviate the increase would be a slowdown in the economy, a tightening of credit, or increase in joblessness.
©, 2019 Rick Muscoplat
Posted on by Rick Muscoplat