Usually seen as slow months in the United States used car market, June and July have seen a significant increase in sales volumes of used cars. The increasing volumes also have, unusually, seen used car prices increase. It appears that several factors have affected the market dynamics leaving buyers with more questions than answers.
So, what’s happening?
What is Driving the Prices Up?
One can’t point the finger at one specific factor for the rise in price. As it stands, several developments have caused the prices to go up. One of these elements is that the used car market is flooded with three-year-old vehicles coming off lease with auction houses working at full steam. In addition to the number of off-lease vehicles, more and more buyers are opting for such cars instead of new ones. A widening difference between the average price for a new or a used car is contributing to this.
We looked at a forecast by the automotive website Edmunds, and its Used Car Report for June. The used car price averaged $19,657 in the first quarter of the year, 2.2% up on the year before.
However, what struck Edmunds’ analysts is the fact that buyers are looking for smaller vehicles. Rising gas prices are bumping the demand for high gas-mileage cars. Thisdemand resulted in an average price increase of 3.9 percent for compact cars and 3 percent for sub-compact vehicles.
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The SUV and truck market were expected to sustain a drop in sales. However, residual values remain strong as some buyers need large cargo capacity and ride height.
Used car prices were “above normal July levels,” Cox Automotive economist Charlie Chesbrough told the media during a recent conference call, Auto Remarketing reports.
He noted that the new car sales were down “quite a bit” year-on-year as buyers switched to used cars. On the opposite side, the company’s auctions, activity showed a rise in the used car prices.
Autotrader executive analyst Michelle Krebs added that affordability plays a significant role in this switch. Three-year-old used cars are excellent alternatives now to new cars. The gap between new and used prices goes in hand with a trend to opt for a usedvehicle with high-end options selected rather than a new base model sub-compact vehicle for the same price.
All in a climate where President Trump is pushing for new tariffs on imported vehicles and parts for them.
CNBC quotes Cox Automotive chief economist Jonathan Smoke as saying the rise does not usually happen this time of the year. So, we can’t ignore that the effects of the president’s decision. Some models are up $400 on average compared to prices last year and $100 on costs the previous month.
He noted that vehicles which should have lost one percent of value, used car prices have insteadrisen 2 percent. Gaining in valueover eight straight weeks during a period in June and July. Buyers could have been prompted by the potential tariffs to buy ahead to avoid a further rise in prices.
With Used Car Prices Rising, Is There Any Savings Potential?
Yes, and a huge one, if you read the latest Edmunds report. The company shows record savings near the end of August on used vehicles compared to new.
Edmunds explains supplies of 3-year-old vehicles hit a record-high level in the second quarter of 2018. These cars accounted for nearly a quarter of all franchise dealer sales.Savings made with a 3-year-old car averaged $13,339.
The company’s senior manager of industry analysis, Ivan Drury pointed to the widening gap between used and new car prices. He added that cars under review, which are considered near-new, offer significant savings. This is due to the supply of off-lease vehicles and a decline in older cars in the market.
According to Edmunds’ analysis, the most significant savings are in the luxury midsize cars segment. Buying a 3-year-old car in this category would fetch forty eight percent savings compared to the new car. On the other end of the spectrum are compact SUVs such as the Toyota RAV4. A best seller when new, continues to carry strong residual values supported by healthy demand in the segment
If you are looking to make the most savings, Edmunds rates the BMW 3 series as your best bet. A 3-year-old BMW 3 series would bring you savings of 48 percent compared to its new counterpart. The residual value has weakened as the compact sedan segment is no longer the entry point into the luxury market.
In conclusion, there is not a single specific reason for the rise in the used car prices. But the increase in auction volumes, buyers switching from new cars to near-new used vehicles and the announced tariff, among other factors, are all working in conjunction to bring the used car prices up.