Used Cars May Not be Such a Good Deal After All

Recently I mentioned, almost in passing, a SmartMoney item that alleged that relatively young used cars were no longer the bargain they once were and that in some cases a new car is actually cheaper. This inspired considerable commentary, much of it of the thoughtful and fact-based variety.

The relative prices of new and barely used cars is a bit more significant an issue than it may at first appear. Conventional wisdom, which until recently I shared with some certainty, is that new cars depreciate violently the moment they become used ones. The consensus seems to be that they lose something like 30% of their new value.

That sort of instant depreciation underlies the argument that used is, in general, a better deal because people place an irrational premium on the new status of cars and attach an irrational stigma to used ones. If the instant loss of value turns out to be untrue, if it turns out that young used cars are only a little cheaper, then perhaps the larger argument that used cars are the smart way to go stops making so much sense.

In keeping with the thoughtful and fact based spirit, I spent a little time this morning on Edmunds.com researching prices for new and used cars. This time of year is an opportune time to investigate this issue because you can get prices for both new and used 2010 model year vehicles. I picked five models, more or less arbitrarily, and gathered the used prices (trade-in and retail) and the new ones (list and invoice.)

Car	Used Trade-in	Used Retail	New Invoice	New List
Toyota Camry LE Auto	$ 15,303	$ 18,840	$ 19,820	$ 21,900
BMW 328i AWD	$ 30,868	$ 34,409	$ 32,340	$ 35,150
Ford Explorer Ltd 4WD	$ 27,473	$ 31,921	$ 35,886	$ 38,600
Chevy Cobalt LS 4dr	$ 10,111	$ 12,988	$ 15,043	$ 15,670
Jeep Liberty Sport AWD	$ 17,458	$ 21,488	$ 24,130	$ 24,865

As a first cut, I found that if you average the two used prices, that is, average what you are likely to be paid by a dealer for the car if you sell it with what you are likely to pay a dealer if you buy it, and compare that to the average of list and invoice, the used cars are about 17% less expensive.

17% ain’t nothing, but it is not that big either. After all, the used cars are somewhat used, so the rational level of depreciation is not zero. They have miles on them and their warrantee is a year shorter.

Moreover, from the point of view of a car buyer, the relevant used price is retail cost, not the midpoint of trade-in and retail. That midpoint is perhaps a better measure of the abstract value of the car, but it is less useful for answering the which is a better buy question.

And using the average of list and invoice may be a bit too pessimistic on what a new car costs. It has been a long while since I bought one, but I get the impression that invoice is not an unrealistic goal.

The average difference between used retail and new invoice price is only 7%. Indeed, for the BMW the used retail is higher. And 7% is not much. It likely could be explained entirely by actual and tangible depreciation on a year-old car, not some crazy preference for new over old.

At the risk of stating the obvious, my sample size is tiny. I am hoping that somebody with access to a large database, e.g. the folks at Edmonds, will do a proper study on a much larger scale. But these numbers are consistent with what SmartMoney and several of my commenters said. Used cars are not the bargain they once were.

Why might this be? Commenter Oldsmoboi, of Cheers and Gears, ascribed most of it to the increased quality and longevity of today’s cars. Decades ago vehicles did not last as long as they do today, so depreciation was naturally faster. That situation greatly improved, but there was a long delay between the time that cars stopped falling apart so quickly and when people stopped pricing them as if they still did. Now, at least for imports, it seems as if everybody has caught on. Domestic cars are taking a little longer, but according to Oldsmoboi that window is closing fast too.

I would also add to this the observation that in the old days cars became dated in terms of style and features much more quickly. It used to be that the model year change-over was easy to notice, that a 1978 car looked different from a 1977. Today noticeable styling updates occur only every few years, so for most cars, a 2010 and a 2011 are virtually identical.

And outside hybrids and other exotics, the technology and feature set of cars is now largely mature and settled. The 2011 model may have better iPhone integration, but the 2010 and 2011 models basically do the same things.

Which all goes to make the point, as if it needed making, that a young used car is only slightly less desirable than a new one. Many of us figured that out a while ago. The news is that it seems that now everybody else has worked it out too.

Then again, it is possible that this recent development is a temporary one. Oldsmoboi makes the point that new car sales for the past two years have been so depressed that the supply of one and two year old used cars is very constricted. It could be that scarcity has driven their prices up, something that will dissipate when (and if) new car sales rebound. Similarly, it may be that new car prices are particularly low just now with so many manufacturers and dealers desperate to make a sale.

Much further research and analysis is needed here. But it is clear that for the moment the conventional wisdom on car purchases is in limbo. A new car just might be a smart move after all. Or maybe not. Your mileage may vary.

Cars | Frank Curmudgeon | October 13, 2010 12:59 pm

187 Comments

By Neil, October 13, 2010 @ 1:26 pm

It could be that the rapid depreciation wasn’t so irrational? People actually do assign value to the intangibles of buying a new car: “new car smell,” status, and general pride and consumer satisfaction that our society has assigned to the purchase of a new car. In a recession, these intangibles become less valuable, so naturally, we pay less for them.

The warranty itself also becomes less valuable in an environment where the preference between “spend today” and “spend tomorrow” is weighted more heavily towards “spend tomorrow.”

It would be interesting to see a long term graph of these numbers to see how they fluctuate over time.
By Mt, October 13, 2010 @ 2:13 pm

I think there may be fewer used cars for sale by owner, and more that are sold “pre-owned” or “dealer-certified”, having been inspected and even given a warranty.

Further, with the internet, everyone must be more fully informed about the reliability of different models. Before, one had to make a trip to the library or bookstore to get a Blue Book. Now, everyone knows the makes and models which are really built to last.
By Jim, October 13, 2010 @ 4:01 pm

This trend has been going on for most of this decade if not longer. In 06 I was in the market for a new (as in new to me) truck and ended up with a new (as in factory fresh) vehicle for less than I could get the same vehicle used for. Granted I did more homework and spent more time in the buying process contacting about dozen dealerships sales managers in order to get the best price and had the actual dealer costs and factory to dealership rebate information. The car I bought before that was in 02 where I bought a less than year old car and paid just about 15 percent less than MSRP so a real world saving of probably maybe only 8 or 9 percent from a deal I could have got just going to a dealership with no other research and I am pretty sure if I did the same homework as I did with my truck I could have bought a new one for the same or less as the used one. The value of both the full warranty and having more protection under state law is worth more than the small upfront savings I had but I was stupid and in a rush.
By Stagflationary Mark, October 13, 2010 @ 4:14 pm

Here’s a glimpse of what used car prices have done according to the consumer price index.

Consumer Price Index
Seasonally Adjusted
All Urban Consumers
Used cars and trucks
1982-84=100

A peak was hit in January 2001 at 160.4. It then fell to a low in April 2009 at 121.719. That was a drop of 24%. It then bounced back and as of August 2010 now sits at 146.093. That’s a 20% increase off of the bottom.

Meanwhile…

Consumer Price Index
Seasonally Adjusted
All Urban Consumers
New cars and trucks
DECEMBER 1997=100 (Note different base year)

Using those very same months I used above yields the following.

January 2001: 98.9
April 2009: 93.178 (drop of 6%)
August 2010: 96.065 (increase of 3%)

Overall, it would seem that used car prices have fallen faster than new car prices since 2001. The last year has seen huge used car price increases though.

That data can be found in the CPI database as found at the BLS.

http://www.bls.gov/cpi/
By Kosmo @ The Soap Boxers, October 13, 2010 @ 5:00 pm

It’s worth noting that you have one fairly big outlier in the mix – the BMW. If you exclude that, the numbers are a bit different. That’s the problem with a small sample size, of course – it’s difficult to determine if the BMW is accurately representing 20% of the market that has those sorts of numbers, or if it is truly an outlier.

I’ve been looking at (model year – 1) cars in anticipation of a purchase next year, and am still leaning used, based on what I’m seeing – but that could change if the numbers change.

[If this comment appears twice, it's because of a technical error - sorry.]
By jim, October 13, 2010 @ 7:32 pm

Worse yet Chevy is offering a $3000 discount on the 2010 Cobalt. I could buy a new one for $13.9k today, (it has some options +destination charge). Used 2010 Cobalts are for sale at $13k. 2009′s are $9-12k.

I think that there are a few things going on here that all add up.

For one thee idea that a car lost 30% of its value the day you drive it off the lot was possibly never exact or maybe just the # from 10,20 or 30 years ago that lingered. Part of that immediate depreciation is the difference between prices from trade in or private sales and dealer lot sales. If you buy a new car then turn around and try to trade it in of course the dealer will make money both ways, or if you pay MSRP for a new car then try to sell it as a private individual then you’ll lose a lot.

Depreciation has always differed based on brand due to resale value and reliability. Toyota doesn’t depreciate nearly as fast as Chevy.

I do think people are buying used a bit more which raises demand for used and keeps prices up a bit.

Car makers and dealers are probably a bit desperate to sell new cars and cutting prices and offering discounts and at the same time they are learning to maximize the profits off new car resale to take advantage of people wanting to save money with used cars.

Cars are more reliable and will last longer so depreciation will be slower and more gradual.

OK I’m rambling and I’ll stop now.
By Frankie, October 13, 2010 @ 9:31 pm

Or look at this.

2010 Corolla LE Invoice $15,419. They are offering $750 cash back. That’s 14,669.

What’s the price on a used 2010 Corolla? $14,889.

A one year old Corolla is $220 more</b< than a used corolla.

If you'd graduated from college in the past two years they will throw in another $1000 off. That makes it $1220 cheaper to buy new than to buy used.

We won't even mention the 0.9% financing for 60 months they are offering….

That being said, I bet someone bought a used Corolla today and brags about how smart and frugal they are for buying used.
By Frankie, October 13, 2010 @ 11:01 pm

Also, with your Jeep example, dealers still have new 2010 Jeeps available and they are offing $2,500 cash back or 0% financing for 60 months.

http://www.edmunds.com/new/2010/jeep/liberty/101213649/incentives.html
By Larry, October 13, 2010 @ 11:01 pm

I never bought into the used car argument, and I would far rather have the peace of mind of having a new vehicle that I know I will break in properly and treat with care. As for the depreciation thing, since I have always kept my cars 10+ years, why should I care? My ideal is to keep a car until it has only salvage value. Like most assets it depreciates, since it’s a personal expense I can’t deduct the depreciation, and therefore why should I care if it loses 30% in one day or in five years?
By Coley, October 14, 2010 @ 12:54 am

I noticed this about a year ago. I wasn’t shopping, but just curious about the current value of our cars. I checked the KBB value of our Honda and Acura, each about six years old with around 100k miles–in my mind, they were halfway used up. Their KBB value was right around half of what we paid for them brand new, which I thought was ridiculously high–it basically means that the depreciation thus far was linear, that driving a car for its first 100k miles is in no way more desirable than driving it for its second (and final?) 100k miles.
By Kosmo @ The Soap Boxers, October 14, 2010 @ 9:04 am

@ Larry:

“why should I care if it loses 30% in one day or in five years?”

OK, let’s take these facts:
- Car loses 30% in one day
- You (Larry) keep a car until it is 10 years old.

Would you rather buy a new car for $20,000 and keep it for the the entire 10 year life? Or buy it after the 30% drop and pay $14,000 to keep it for the remaining life (9 years)? In other words, 100% of the life for 100% of the cost, or 90% of the life for 70% of the cost (granted, the first year is under warranty, so you’re losing more than 10% of the functional value).

The issue isn’t whether or not the value is going to depreciate (it will), but rather the fact that it usually depreciates at a non-linear rate, and at times more quickly than the actual drop in functional value.

So you probably DO care how quickly it depreciates … but if the early year depreciation isn’t very much, you still might opt for the new car.
By Erik, October 14, 2010 @ 9:53 am

I was also a member of the year-1 buying club 8 years ago. I bought two cars then and still own them today. At that time, the Mazda protege was around 25% discount and the Mercury was around 40% but in both cases the actual spread was probably less due to dealer discounts.

I read a different piece that compared buying new cars and selling after 3 years vs. buying 3 year old cars and selling in 3 years. The conventional wisdom is that option two is much better but in fact they turned out to be fairly equivalent.

My thought on this is that cars last much longer and buying a 6 year old car is now the real value point of entry. Many six year old cars with 75k miles still have plenty of low maintenance life.
By Frankie, October 14, 2010 @ 10:31 am

Many six year old cars with 75k miles still have plenty of low maintenance life.

Yes, and they are priced accordingly.

2004 Accord LX Auto with 75,000 miles is $10,529

2010 Accord LX Auto with 0 miles is $18,023*

* Includes $1800 cash back

I just can’t see how you come out ahead with the ’04. If the ’04 was 6k I could see it – but 10k?
By Holly, October 14, 2010 @ 11:06 am

Why would I want to pay $20,000 for a new automobile when I can pay $16,000 for a (reliable brand) 3 y.o. one that comes w/new tires, brakes, is detailed, has a complete inspection/tune-up and a 3-yr. certified warranty from the dealer? Thanks, but I’ll keep the extra 4 grand in the bank.
By Investor Junkie, October 14, 2010 @ 11:09 am

“And outside hybrids and other exotics, the technology and feature set of cars is now largely mature and settled. The 2011 model may have better iPhone integration, but the 2010 and 2011 models basically do the same things.”

I disagree with this statement. The tech in cars has gotten considerably better not only for things like bluetooth, DVD players, iPhone intergration and alike, but also tech for safety and fuel economy. Heck, Google just announced cars that drive themselves. In traffic no less. How many years before we see this?

If you look at the tech of cars 10, and even 5 years ago, they are dramatically better now.

Does the car have four wheels, an engine and transmission? yes, but things like lane change warning, adaptive cruise control, navigation was either not available because the tech wasn’t there yet, or was really costly.

Internet integration into the car is the next big leap, and I’m not talking about tweeting while doing 80 MPH on highway 101.
By Frankie, October 14, 2010 @ 11:16 am

why would I want to pay $20,000 for a new automobile when I can pay $16,000 for a (reliable brand) 3 y.o. one

If the car lasts 15 years and 200k miles then a three year old car has already run through 20% of its useful life. If the car had depreciated 30% but had 80% of its life left, then it would be a deal. When you pay 20% less for a car that’s consumed 20% of its useful life you’re wildly overpaying.
By kahn, October 14, 2010 @ 1:03 pm

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Thank you
By Ben, October 14, 2010 @ 1:22 pm

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