Off-lease inventory, lack of older vehicles prompting greater savings in used market

The gap between used vehicle prices and the price for a new model of the same vehicle is at a record high point, according to the automotive site Edmunds.

In its Used Car Report for the second quarter of 2018, Edmunds analysts determined that the average three-year-old used vehicle had a savings of $13,339 compared to a new vehicle of the same make and model. This was up from an average savings of $10,632 in the second quarter of 2013.

"The gap between new and used vehicle prices is significantly widening," said Ivan Drury, senior manager of industry analysis at Edmunds. "Near-new vehicles offer greater savings now than they ever have before, thanks to a constant supply of off-lease vehicles and a shortage of older vehicles in the market."

The report determined that three-year-old luxury midsize cars had the greatest savings, with prices that fell 48 percent below their new counterparts on average. The typical off-lease sports car had a 45 percent discount, while large cars sold for 43 percent less than a newer vehicle.

Midsize trucks offered the least amount of savings, with the typical three-year-old vehicle in this segment available at a discount of just 27 percent. Three-year-old luxury large cars had prices that averaged 30 percent below new vehicles, while large trucks were typically available for 33 percent less than new vehicles.

"Luxury midsize cars serve as an example of the used market providing significant savings since these vehicles often have the highest lease penetration rate of any vehicle category," said Drury. "On the other end of the spectrum, midsize trucks is a category that has been invigorated on the new sales front with the resurrection of old models, but leasing has never been popular among these shoppers. And with such limited quantities on the used market, midsize trucks retain high values, making them less appealing from a savings perspective."

The report also looked at the 20 bestselling vehicles in the United States to compare three-year-old model prices to new vehicle prices. The BMW 3 Series had the largest savings for used vehicles at 48 percent, followed by the Chevrolet Malibu at 46 percent and the Chevrolet Cruze at 45 percent.

The Toyota RAV4 had the least amount of savings for used vehicles, with a three-year-old model available for 29 percent less than a new model on average. The Honda CR-V typically had a 30 percent discount when used, while the Toyota Corolla offered an average savings of 32 percent.

"BMW's 3 Series faces weakened residual values because of high lease volumes in a segment that is no longer seen as the entry point into the luxury market, but those who regard the 3 Series as a luxury compact sedan to own can benefit from significant savings," said Drury. "On the other end, the Toyota RAV4 was a bestseller when new, and even though it was heavily leased three years ago, the strong residual values of this vehicle combined with the healthy overall demand in the compact SUV segment don't allow for significant savings."

Used vehicle sales continued to climb in the second quarter of the year, with Edmunds putting the total number of these sales at 10.42 million – a year-over-year increase of 2.5 percent. Certified pre-owned vehicle sales grew by the same amount, totaling 711,270 during the quarter.

Nearly one in four used vehicles sold during the quarter, including 25.5 percent of franchise dealer sales, were three years old. This record high level of three-year-old vehicles indicates a strong volume of off-lease vehicles entering the market. The report says that due to the high number of leases in new vehicle transactions, off-lease vehicles will continue to make up the majority of franchise used sales at least until 2021.

The high inventory of newer used vehicles contributed to an increase in the average transaction price for this type of vehicle. The typical used vehicle price stood at $20,153, a 3.3 percent increase from the second quarter of 2017 and the highest average price since 2005.

Edmunds noted that this increase was considerably higher than the annual price growth of 0.8 percent in 2016. The report suggests that this indicates differing reactions to higher fuel costs, with some buyers opting for a more efficient vehicle and others deciding that fuel expenses are still tolerable when considering whether to buy a truck or SUV.

Even with the influx of three-year-old vehicles, this inventory wasn't staying idle for long. The average vehicle of this age found a buyer in 38 days, the fastest turnaround period since 2005.

The report says the possibility of tariffs on imported vehicles could disrupt the used vehicle market in a number of ways. Some buyers may opt to purchase a near-new vehicle instead of a new vehicle with associated tariff costs, while used vehicle prices could increase more quickly than expected due to higher demand if enough new buyers enter the market.

"If tariffs are enacted against specific models, these savings figures are bound to change and are certain to test customer loyalty," Drury said.

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