by Pete Levy
The numbers are in and the analysts have spoken. Here is the briefest of summaries:
- New car sales have been and continue to be strong.
- Which leads to an over supply of used car trade-ins and lower used car prices. (Black Book reports an expected overall 13.5% depreciation in used car prices in 2014 – much more than usual).
- Which then requires car makers to lower prices and increase incentives to keep new car buyers from switching to used cars. (“the automakers are going to have to increase incentives more.” said Larry Dominique, executive vice president of TrueCar Inc.)
Faced with the above facts, many pundits suggest that this is a great time to buy a used car. According to The Car Connection, “if you can do without that new-car smell, it’s a great time to go with a late-model used car or truck.” But not necessarily a great time to buy a new car, per the TrueCar quote above.
But the above wisdom feels like a discussion of a perfectly efficient market (“if the price of beef goes up, people eat more chicken, until the price of chicken goes up and beef goes down and then the market is at equilibrium again.”)
Certainly the car market is subject to the laws of supply and demand, but are new car buyers willing to switch to a used car the moment the price differential widens by a dollar? If they were, then instead of seeing the trends above, we would see used car prices stabilize as demand switched from new to used.
But what if buyer’s new car preference was simply getting stronger? There are a host of features that are becoming more widespread in new cars but are not widely available in used cars, such as bluetooth, voice recognition, phone integration, and rear cameras. Maybe people really want these items – according to a recent survey by NADA, almost half of new car shoppers rated “technology” as important buying considerations, and over half rated “advanced safety features” as important.
Recalls and Used Cars
Then there are the enormous volume (and publicity) of recent recalls. At any given time, it’s used cars, not new cars, that are being recalled. And if bad news hurts demand, it’s used car bad news that would be in effect. Furthermore, for every used car recalled, there is a car owner who has to make a trip to a new car dealer as the recalled car is serviced – and wouldn’t you look good driving that new car, sir.
So what if demand for new cars stays strong because buyers prefer new cars? That would suggest that there is a new equilibrium, at least for a while. New car prices won’t be coming down (in fact, they’ve been going up), and used car prices will continue to be depressed.
The bottom line
A buyer doesn’t buy the “new car market” or the “used car market.” He or she buys one specific model. And when you look at individual models, nice general statements aren’t worth much. For instance, the Toyota RAV4 and Corolla had a very strong month in new car sales, so don’t think you’re going to get a big discount on those new models. Several Honda model sales were down, so you may find discounts there.
And on the used side, try buying a recent used Toyota Prius in the Bay Area that’s a great deal compared to a new one (go ahead, try here on Craigslist.) You can’t. Prius owners who buy a new car are keeping their Prius as a second car rather than trading it in, keeping a tight supply and a high price for used Priuses.
So is it a good time to buy a new car or a used car? It doesn’t depend on overall market trends. It depends on the particular vehicle you want.