On one level, car buying compares the price of a new vehicle with a used one. As a rule, the latter is always cheaper than the former because of what bean counters call “depreciation.”
The term describes the lessening value of a piece of machinery as it is used, the wear and tear factor. The moment a new car is driven off the dealer’s lot it becomes used, less valuable. One year of driving later, depreciation can wipe 20 percent off a car’s value and each subsequent year the same.
Besides depreciation, other factors affect value: low mileage is better than high; fuel efficient better than a guzzler; quality perceptions may allow certain brands (e.g. Lexus) to hold higher value. But all things considered, a used car is generally a lot cheaper than a new one so many consumers look for used when in the market for a car. They’re in for a surprise.
The used car market is under siege; demand is soaring. Shortages, due to the earthquake and tsunami, of new Japanese brand cars have nudged buyers to the used car market where such brands have a reputation for quality. Combine that with the continued slow economic recovery, buying a used Toyota or Honda can make economic sense. But a surfeit of like minded consumers has driven up prices by as much as $3,000 in the last six months.
Price hikes are spilling over to other brands as well because of another problem: short supplies. Only a couple of years ago, the government program of new car subsidies accompanied by trade-ins of “clunkers” resulted in the destruction of more than 600,000 older used cars. Further, the recession-induced auto production slump reduced new car leases, a principle source of used cars. As you would expect, the biggest price hikes have occurred in the compact and midsize sector, 18 and 13 percent respectively.
The good news: if you want to buy a new car and currently own one, its trade-in value is at an historic high. Dealers are hungry for used cars and there are good deals out there. Without a trade-in the high price for used cars may make a new car purchase more economically palatable.
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