Car Buying Tips: Feeling Used

By on February 28, 2017

Every year over ten million vehicles pass through U.S. auto dealer auctions. This decades old free market has always been dependent on you, the consumer. Dealers will bid up those models that are popular with buyers, while those with a limited audience are stuck in what’s commonly called ‘wholesale heaven’.

This is a place where thousands of unappreciated and unloved models go until the market dictates otherwise. Consumers represent the free market that dictates the winners… and the losers.

Wholesale heaven is actually hell for the automakers. Today’s losers don’t just sit when they leave the factory. They’re leased on the cheap, financed to those with shaky credit, and pushed out with rebates and incentives that keep the factories from shutting down forever. It’s a slow bleed that eventually leads to millions of unloved cars that hit the bottom line with a metallic thud.

There are two main causes for today’s used car glut.

First, the manufacturers always shut off the supply spigot late in the game. Thanks to Wall Street’s quarterly expectations and timid management, automakers routinely fail to ‘chase down’ falling demand early or aggressively enough. The failure creates an ongoing surplus of used cars.

Image result for graph auto rebates and incentives

Second, again, The Big 2.5’s market share for new cars is still falling and they’re still failing to match supply to new car demand. Banking unsold inventory and rediscovering badge engineering has lead to hundreds of thousands of vehicles that consumers do not know or care about. For every Avalon and Accord that is given exclusive attention, there is a Regal, a Lacrosse, or a Taurus that isn’t given the resources needed to become a market leader.

This endless stream of unpopular and largely unloved new cars– and the sales incentives that inevitably follow– has creates a significant benefit for the U.S. consumer: a depreciation curve that make unpopular used cars a fantastic deal.

In the early days of zero percent financing (late 2001), experts estimated that every $1000 in new car sales incentives resulted in a $400 decline in the price of a two-year-old version of the same vehicle. By the time employee pricing came to the forefront (the following summer), the hit to used car prices was closer $600.

Many dealers peg the current depreciation rate at around $700 per $1000 in new car incentives. For your neighborhood used car dealer, their late model inventory now has a depreciation curve that’s nearly as steep as a new car vehicle’s. As a result, there are literally tens of thousands of unsold low mileage cars churning from dealership to dealership.

The bottom line: a leftover 2016 Mazda Miata sells for around $27.5K as a new car. That’s not much different than the price of a new Miata 10 years ago.  Earlier this month, a brand new 2016 Buick Cascada with only 47 miles sold for only $25,400 at a wholesale auction here in the Southeast because the dealer couldn’t retail it. Not that many consumers would cross-shop the two, but keep in mind that a brand new well-equipped Buick that stickers for over $33k may likely cost the same as a base Miata.

Buick sales are down over 28% from a year ago and they are one of many domestic brands that are falling on hard times in the used car market.

In the last 60 days, a savvy buyer could also pick up a low mileage Chrysler 200, Ford Focus SE, or Chevy Malibu for around the same money as a brand new, 2017 Kia Rio. That’s cheap.

You may notice these models are the unloved off-spring of over-stretched or neglected models. The selection and price reflects a new reality: manufacturers have created a perfect storm of overproduction, fleet sales, limited marketing resources, and bad mid-cycle refreshes of stale product. Though they’ve been available for years, models like the LaCrosse, Focus and Malibu are falling through the cracks, and into used car depreciation hell.

Plenty of consumers “get it.” As vehicle reliability has increased, more people are buying used– but still not enough to outstrip supply. And yet still, the new cars keep coming.

For those of you who understand that depreciation is the single largest cost of automobile ownership, or who simply want as much car for the money as they can afford, used cars rule.

As for what you should pay, go to the “completed items” section on Ebay and look for a car that’s roughly equivalent to the apple of your eye. You’ll find a price that’s usually a bit higher than wholesale, but lower than the inflated retail values you’ll find at Edmunds and Kelley Blue Book. There’s your starting point.

Call or email a few dealerships and bargain hard. You’ll soon see that the old 80/60 principle for a three-year-old model (80% of the life for 60% of the original selling price) is now closer to an 80/40 split.

It’s proof positive that the free market has spoken. Until and unless mainstream manufacturers can better match supply to demand and learn to produce fewer, more distinctive models, their new cars will continue to make one to three-year-old models cheaper and better values.

It’s a virtuous circle – for you.

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