Flood of Off-Lease Vehicles and Dropping Residual Values Create Buyer's Market for Car Shoppers, According to New Edmunds Report
SANTA MONICA, CA — May 23, 2017 — Car shoppers hitting dealer lots this Memorial Day weekend will be pleased to find themselves in one of the strongest buyer's markets in recent memory, according to the latest Used Vehicle Market Report from Edmunds. A growing glut of off-lease vehicles means shoppers who are looking for a car between 3 and 4 years old will have a huge selection to choose from, and this surplus also means dealers will likely be ready to negotiate to help close the deal. As an added bonus, Edmunds analysts also noticed a growing shortage of vehicles 6 years old and older, meaning shoppers can command top dollar for these in-demand trade-ins.
"The leasing surge we've seen over the past few years is taking hold and changing the face of the used-car market," said Edmunds Senior Analyst Ivan Drury. "With new-vehicle sales already beginning to stagnate, swollen inventories of off-lease used vehicles hitting the market and priced to move may cannibalize new-car sales and further strain residual values."
Edmunds finds 3-year-old vehicles held 64.5 percent of their value in the first quarter of 2017 — down from 68 percent in 2010. And as residual values drop, MSRPs have continued to rise at a disproportionate rate, which is leading to mounting losses in the leasing sector. As an example, in the first quarter of this year, the original MSRP of a 3-year-old vehicle was $34,200, up 14.7 percent compared to Q1 of 2010. However, the average retail value of a 3-year-old vehicle was $22,100, only an 8.7 percent gain compared to Q1 of 2010. This means the average 3-year-old used vehicle is being sold for $1,200 less than the market anticipated it would be worth when it was new.
"Many car shoppers want to lease, so automakers are willing to lean on incentives to help make up the difference and keep payments in line with what consumers are accustomed to," Drury said. "But the pressure on the market is mounting."
Additionally, while the average price of used vehicles hit an all-time high of $19,227 in Q1 of 2017 — a year-over-year increase of 2.1 percent — Edmunds analysts say this record is a bit misleading. The vehicles on dealer lots are much newer now than they were five years ago. In Q1 of 2012, 41 percent of used vehicles sold were 3 years old or newer, while in Q1 of this year, that figure stood at 53 percent.
As this transition in the used market continues, the older used-vehicle market remains the bright spot. The average age of a traded-in vehicle is currently 6.4 years, which is essentially flat year over year. However, the number of buyers who are willing to part with their existing vehicles continues to fall, contributing to an increase of $2,900 in retained values of 6-year-old vehicles during that period.
"Lease returns will continue to flood the market over the coming years, while older used vehicles are poised for higher prices due to the supply shortage," said Drury. "What this means for consumers is that it's a great time to weigh your options between buying a new or near-new used vehicle. Both sides are feeling the pressure of increasing inventories, so buyers are in a strong position to take advantage of great pricing and model availability."
To read the full Edmunds Q1 2017 Used Vehicle Market Report and for more automotive industry data, insights and commentary, check out the Edmunds Industry Center: https://www.edmunds.com/industry-center/
Edmunds is the leading car information and shopping platform, helping millions of visitors each month find their perfect car. With products like Edmunds Your Price, Your Lease and Used+, shoppers can buy smarter with instant, upfront prices for cars and trucks currently for sale at more than 13,000 dealer franchises across the U.S. Edmunds' in-house team of unbiased car shopping experts provide industry-leading vehicle reviews and shopping tips, as well as welcome all car-shopping questions at our Help Center, via email at firstname.lastname@example.org and on Twitter and Facebook. Edmunds is based in Santa Monica, Calif. and has a satellite office in downtown Detroit, Mich.