Used Car Prices Surge to Record High as Leasing Becomes More Popular
Used car prices reached record highs for the second quarter as volumes of near-new off-lease vehicles increased and a limited supply of older cars hold tight to their value, Edmunds said in a report on Wednesday, Sept. 6.
The average transaction price of a used vehicle in the second quarter was $19,277, a 2.1% increase from the same period last year and a new record for the three months ended June 30. The spike in prices is hitting the lowest end of the market the hardest, Edmunds said, as cars six years or older hold on to their value more than ever before.
Five years ago, a 10-year-old vehicle retained about 21% of its original MSRP. Today, a 10-year-old vehicle retains 26.4% of its original MSRP. That figure is even more staggering for SUVs, where the retained value 10 years out doubled to 32.5% this year from 16% five years ago.
"Those who can't afford to spend a lot are going to get squeezed on pricing, especially as a sudden increase in demand makes finding cheaper used cars even more challenging," said Ivan Drury, Edmunds senior manager of industry insights.
Victims of Hurricane Harvey whose cars weren't completely covered by insurance write-offs are on track to be especially pinched, Drury added. Owners who don't have insurance to cover the gap between the current market value of their damaged car and what they owe on loans and leases will have to pay the difference.
Texas is the second-largest used car market in the country, Edmunds said. During the first half of the year, 72.9% of vehicle sales in Texas were used, compared to 74.9% nationwide. A large portion of the auto market in Texas is SUVs and trucks, which hold their value well -- meaning comparable replacement vehicles could be in short supply.
As the stock of affordable older cars become limited, bargains on more expensive, newer used vehicles might increase. A glut of off-lease vehicles and rising incentives add pressure to residual values of newer cars, leading to faster depreciation, Edmunds said. A one-year-old used vehicle retained 76.6% of its value in 2012, but retained just 70.9% of its value in 2017.
"You often hear that the value of a new car drops dramatically the moment it's driven off the dealer's lot, and that's more true than ever now," Drury said. "The surge in popularity of leasing has led to a more disposable mentality about personal vehicles, which has taken a toll on the values of newer used cars."
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