Lower Used Car Prices Cut Both Ways - Forbes

Used-car prices are in a general decline, despite some ups and downs, and despite the fact that used-car prices have remained higher, longer, than many analysts expected.

In fact, the wholesale price of the average used vehicle actually increased a bit in October – the most recent month for which detailed statistics are available — according to auto auction firm ADESA Inc., Carmel, Ind.

The average used vehicle was $9,678 at wholesale auctions in October, up 0.9 percent from a year ago, ADESA said. To put that in context, wholesale used-car prices hit a recent high of $10,625 in March 2012. That number bottomed out at $8,628 in October 2008, according to ADESA data.

The more recent erosion of used-car prices is a significant trend in the U.S. auto industry, part of a chain reaction of cause and effect.

ADESA auction; company photo

The business fundamentals are that used-car prices rose because new-car sales fell in the run-up to 2009. A spike in gas prices also helped drive down the value of used pickups and sport-utilities.

In 2009, per-capita U.S. auto sales fell to the lowest point since World War II. Both General Motors and Chrysler went through bankruptcy restructuring and a government bailout, and Ford Motor Co. downsized and restructured on its own.

The drop in new-car sales meant that down the line there would be fewer late-model used cars. The scarcity of "nearly new" used cars caused prices to rise for those cars, and also drove up prices for older used cars as demand for those took off.

Today, used-car prices are feeling the increase in new-car sales since 2009, which increased the supply of late-model used cars.

The good news for customers shopping for used cars is that used cars are becoming more affordable. The bad news for new-car customers is that lower used-car prices mean you get less for your trade-in.

Over a long period of time, lower used-car prices also make leasing more expensive. In leasing, the customer borrows the difference between the upfront cost and the car's predicted value at the end of the lease – the residual value. Lower expected used-car values mean lower residual values, and lower residual values mean the customer has to borrow more.

In an analysis earlier this month Tom Kontos, executive vice president and chief economist for ADESA Analytical Services cited, "the inherent softness of a wholesale used vehicle market facing high incoming supply."

Source : http://www.forbes.com/sites/jimhenry/2014/11/30/lower-used-car-prices-cut-both-ways/