As much as every American would love the idea of owning a new automobile, the current market conditions are favorable to kicking a few tires on a used vehicle and making the purchase instead of going with something new off the lot. Experts agree that this trend will continue through the remainder of 2018. So what is behind the switch from new to old?
Interest rates for one. While those of us who have been around through the circa 1980’s stagflation, 5 percent rates or there about doesn’t seem too bad, but for millennials and the younger generation, that is not the case. The advent of urban living and Uber have pushed the millennials away from car purchasing in general.
Rising prices as one would imagine, are dampening new car sales. The summer showed that a combination of higher interest rates and rising prices were pushing consumers away from the new car lots and to used car mega-dealers like Auto Nation, which opened its first used-car center last year, aiming to capture more of the preowned business as U.S. demand for new cars and trucks cools. Expert sentiment can attest to this. Cox Automotive’s 2018 Used Car Market Report & Outlook forecasts higher used-vehicle sales for 2018 and a decline in new-car sales. Cox states that economic conditions improved throughout 2017, helping support 39.3 million used-car sales, up 1.8 percent from 2016. New-car sales, conversely, reached 17.1 million, down 2 percent.
Cox has a similar forecast for the remainder of the year, stating the economy is expected to accelerate further in 2018, supporting higher used-car sales of 39.5 million. New-vehicle sales in 2018 are expected to decline to 16.7 million, however. The gap between new and used car prices has grown, as manufacturers have added bells and whistles in the way of new technology that has pushed the average price of a new vehicle to all-time highs at around $36,848. According to Brian Allan, a senior director at Galpin Motors Inc., a Southern California dealership chain, “Customers forget a new car is now more than $30,000 and they expect it to be $20,000.”
In an effort to keep new sales moving, auto financiers have lengthened the term of a typical loan out to 5 and 6 years, and have been offering 0% financing to qualified buyers. If inflation rises and interest rates continue higher, the plug will probably be pulled on these types of new car incentives. Even with such help, the average monthly payment on a new car was $536 in August, up from $507 last year and $463 five years ago, according to Edmunds.com. That is a huge percentage of the median income of the average American family. One wonders just how subliminal the constant bombardment of television advertising is on consumers. Especially the Mercedes Benz ads that say, “You deserve to own one.”
I assume consumers are still aware of the fact that an automobile is a depreciating asset. Case in point. A new Lexus RX hybrid is roughly $66,000. With 6 million off-lease vehicles returned to market in 2017, and 3.9 million expected to come back in 2018, there is now a used market for cars that are only 2 or 3 years old. This is exactly when new vehicles depreciate the most. The average price for that same Lexus with 30,000 miles that is 2 years old was $44,000, a savings of $22,000 from the new one. Not too shabby.