SANTA MONICA, Calif.—Two automotive pricing companies differ on the direction in which used car values are heading, but both agree the used car bubble won’t be bursting soon.
Both Edmunds.com and Black Book are forecasting that values will hold, but Edmunds.com sees values remaining stronger longer, while Black Book points to the start of declining values.
Edmunds.com recently reported that used values over the last year have gone up, adding that it is difficult for buyers to find good value in the market with prices still inflated post recession—when consumers began holding onto their cars longer, reducing the number of used cars on the market and driving up values.
In the first quarter of 2015, Edmunds.com reported a 7.1% increase in used vehicle prices over the same period a year earlier, to $18,088 per unit, nearly a record high.
Jessica Caldwell, Edmunds.com senior analyst, said that the average value of all used vehicles reached its highest point ever in the fourth quarter of 2014, before dipping slightly in Q1 2015. “Had we not hit a record value at the end of the year, this first quarter’s average value would have been the high mark.”
But Black Book sees things a little differently.
“One of the vehicle cohorts we track is the two-to-six-year-old vehicle,” said Anil Goyal, VP of automotive valuation and analytics. “So for June of this year it would be model years 2009 through 2013. That price was $15,037. The previous June, for the same two-to-six-year-old cohort, the price was $15,260. Year over year that price dropped 1.5%.”
That decline differs from used value trends the Lawrenceville, Ga.-based Black Book has seen in recent years—annual values for the same cohort of vehicles increased in each of the last three years: 5.1% in 2012, 7.6% in 2013 and 5.8% in 2014.
Growing New Car Prices
What Edmunds.com sees as contributing to used values continuing to climb, even into 2015, is the growing price of new cars—driven largely by new technology features, like back-up cameras and Wi-Fi—pumping up the price of overall used values as the former new cars either come off-lease or are traded in.
“Really, a lot of the used values going up is being driven by the growing interest in leasing we have seen in recent years,” said Caldwell. “These tend to be higher-end cars, and they are loaded with new technology, and they are coming off-lease.”
Many automotive industry experts, including Black Book, have predicted for more than a year that leasing’s growing appeal will eventually drive down the value of used vehicles as large numbers of lease terms are completed and the cars hit the used market. The greater number of used cars on the market, experts predict, will drive down used prices.
But Caldwell said that despite the Edmunds.com forecast that off-lease vehicles are driving up values, that could change.
Referring to predictions that large numbers of off-lease vehicles will drive down used prices, Caldwell said those analysts “are not wrong. We see that happening now with cars that are in less demand.”
Caldwell said that mid-size and compact car values are not holding well now, and that as those classes of vehicles come off-lease, those vehicles’ used values are falling fastest.
“But you don’t see that same thing happening with SUVs and trucks, which are in high demand,” said Caldwell. “For example, used full-size truck values are up 5% year over year, while subcompacts are down 2% to 3%. So there are forces working against each other, and it’s difficult to make one blanket prediction when it comes to leasing impacting used values, and used values in general.”
Used Market Still Strong
Overall, Black Book assesses that the used car market has been very strong from a historical standpoint, and continues to be strong, but values are starting to head down as depreciation, overall, picks up.
“We are beginning to take a breather now, in terms of rising used prices. We still see demand for used, but we see the supply of used vehicles increasing more than demand. So supply will overtake demand in the next year or two,” said Goyal, adding that readily available credit has helped keep used cars in demand. “Now, some of the big banks are starting to back away from subprime, so that will impact the number of used cars sold, as well.”
Overall used car depreciation has hovered around 14%-14.5%, where Black Book sees it finishing at the close of 2015. “Over the next two to three years we expect to see that figure closer to 17% to 18%,” said Goyal.
Even with the sharper drop in used values coming, Goyal said Black Book does not foresee the used bubble “bursting. We do see a normalization of the market, but more of a softer landing, more toward pre-recession normalcy.”