Taxpayers are well aware of the toll taken by the financial crisis on new car sales, since their tax dollars saved two of the Big Three American manufacturers. For many families the more relevant development has been the sharp increase in used car prices since the recession, in response to a relative shortage in the supply of pre-owned vehicles. Finally, it looks as if potential buyers may be getting some relief this year.
Sales of new cars plummeted during the recession, falling to a 27-year low of 10.4 million units in 2009. But perhaps more significantly, supplies of resale vehicles unexpectedly contracted thanks to fewer trade-ins and lease terminations, and the determination of drivers to hold onto their current rides for an extra year or two. Also in July 2009 came the misguided Car Allowance Rebate
System, otherwise known as “cash for clunkers,” which destroyed 690,000 perfectly serviceable used vehicles. No wonder the average age of cars on the road has increased from 9.8 years to 11.4 since 2002, according to RL Polk.
Meanwhile, thanks to the shortage of older vehicles, prices have been on a tear. The National Auto Dealers’ Association reports that average prices for a used car spiked more than 10 percent in 2010 and a whopping 33 percent from 2008 to 2012.
At last, some relief may be on the horizon. NADA predicts that average prices for used vehicles less than nine years old will decline by 1.6 percent from 2012 levels, thanks to a welcome increase in supply as more new car buyers trade in their older models. Edmunds.com projects total new unit sales of 15.5 million for 2013, nearly 50 percent higher than the low ebb of 2009.
And smart buyers may be able to further increase the odds of getting a better deal if they arm themselves with a little inside knowledge.
Online search engine iSeeCars.com offers some valuable negotiating tips. They analyzed price action on 30 million used cars for sale over the past twelve months, and discovered something interesting. The average dealer needs about a month to move a typical vehicle, and often reduces the price from one to six times until the car is sold. They found that about 20 percent of used car prices were cut by at least 7 percent, or roughly $1,050 on a $15,000 car.
The web site aggregates listings of 4 million used cars and compares the list prices to an estimated fair market price computed using a proprietary pricing model. Potential buyers can compare the list price against the fair value, and see how many days the car has been listed. Armed with this valuable data and a little patience, buyers can improve their odds of striking a better deal with a motivated dealer sitting on a set of wheels for more than a month. Buyers can even initiate inquiries with sellers directly through the iSeeCars.com website.
The financial crisis and ensuing recession have not been kind to used car buyers. After five years, it looks like the tide is finally turning.
Christopher A. Hopkins, CFA, is a vice president for Barnett & Co. Investment Advisors. If you have a personal finance question, send it to firstname.lastname@example.org and Hopkins will answer in a coming column.
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