GAINESVILLE, Ga.-More signs are appearing that the used car price bubble may be closer to bursting.
The increase in new car sales this year is producing more trade-ins, and many carry markedly higher mileage and more years than trades before the recession, due to the fact consumers have been holding onto their cars longer. Add to that the fact rental car companies are selling more of their fleet cars months ahead of schedule, and now is a time lenders must pay close attention to used values, analysts are saying.
That is the advice of Ricky Beggs, VP and managing editor at Black Book, who earlier this year noted that used values were declining on sales at the wholesale auction lanes ("Used Car Values Starting To Idle," Credit Union Journal, May 21). New car sales in 2012 are expected to end up at about 1 million to 1.5 million units above original projections, which Beggs says means about 900,000 more trade-ins, with a little more than half of new buyers turning in their old cars.
The greater number of used cars on the market alone will drive down price, pointed out Beggs, who added that the trades dealers are receiving today tend to be about three to four years older than they were before the recession, with another 30,000 to 50,000 miles on the odometer.
"Many of the dealers won't keep all these older, higher-mileage cars on their lots because they can't sell them easily. So they are taking many straight to the wholesale market. One dealer told me he used to keep about 60% of his trades, right now it's 30%."
Consumers ditching their higher-mileage old cars, Beggs surmised, will have the opposite effect on used values that Cash for Clunkers did. That government-backed program took 750,000 old cars off the market, as they were destroyed. That drove up the price of used vehicles, reminded Beggs. "It amazes me what that six-to-nine-year-old car will bring now."
Where Values May Decrease Most
The values of the six-to-nine-year-old car increased markedly after the recession, noted Beggs, who thinks that is the age range that could see the greatest decrease in value. "This decrease could sneak up on us-anytime in the next three to four months or the next year-and-a-half."
Car rental companies are also disposing of more fleet cars now than expected due to lack of business, said Beggs. "Retail rental has not been as strong as anticipated. The companies are not renting as many cars so they don't need as much inventory. They are turning in some of their slightly older, higher-mileage cars."
The new model year cars, which will begin arriving in late August, will also drive down used prices, said Beggs. "My advice to lenders is to watch that older, six-to-nine-year-old car, whose price really inflated in the last two to three years, as having the potential for greater downward price volatility. It could begin tracking closer to that 11-to-12-year-old car, which is the softest value now."