Leasing Drives Record-Setting Used-Car Sales, Edmunds Finds | Edmunds

Leasing Drives Record-Setting Used-Car Sales, Edmunds Finds

Driven by the popularity of leasing, used-car sales topped 10 million for the first time ever during the second quarter of 2017, according to the latest Used Vehicle Market Report from Edmunds.

Over the past five years, the popularity of leasing has grown significantly, and Edmunds analysts have found that the glut of late-model vehicles coming off leases has had a dramatic effect on the used-car market. Total used-vehicle sales are up 1.7 percent over the second quarter of 2016, and the average transaction price for used cars is now $19,227, a 2.1 percent increase from this time last year and a record for the second quarter of any year in history.

In addition, the high number of off-lease vehicles is saturating the market, which is reducing the residual value of used cars. In the second quarter of 2012, a year-old vehicle retained 76.6 percent of its value, but in the second quarter of this year, a year-old vehicle retained just 70.9 percent of its original sale price, with the value of smaller cars hit the hardest.

Edmunds analysts found that an average 1-year-old subcompact car is worth 15 percentage points less than five years ago (85.2 percent retained value in 2012 vs. 70.2 percent in 2017), average midsize cars are worth 9.5 percentage points less (73.4 percent retained value in 2012 compared to 63.9 percent in 2017), and large cars are worth an average of 8 percentage points less (67.8 percent retained value in 2012 vs. 59.8 percent in 2017).

Interestingly, once a car reaches about 6 years old, the rate of depreciation slows. Vehicles between 6 and 10 years old are becoming more scarce and are worth considerably more now than they were five years ago. In 2012, the average 10-year-old used vehicle retained 21.1 percent of its value, while so far in 2017, a 10-year-old model is retaining 26.4 percent of its value.

"The dynamics of the used market are completely different now than they were five years ago, and we don't see this trend reversing anytime soon," said Ivan Drury, senior analyst for Edmunds. "Leasing grew steadily until late last year, so the near-new vehicle stock will continue to grow, and it's going to take time to replenish the supply of older used models. It's good news for those who can afford it, but for shoppers who need to find reliable transportation on a budget, this is a challenging scenario."

This is especially bad news for Gulf Coast residents trying to used cars to replace vehicles destroyed by Hurricane Harvey, said Drury, noting that Texas is the second-largest used-vehicle market in the country.

"Prices are at record highs due to high volumes of near-new off-lease vehicles," he said. "On the other end of the spectrum, older used cars are holding their values at high rates and are in limited supply. Those who can't afford to spend a lot are going to get squeezed on pricing, especially as a sudden increase in demand makes finding cheaper used cars even more challenging."

Nationally, Edmunds data shows that in the second quarter of 2012, the retained value gap between the average 1-year-old and 10-year-old used cars was 55.5 percent. In quarter two of 2017, that gap narrowed to 44 percent, as newer car values declined and older car values rose.

The popular midsize SUVs are a main driver of this trend. The average 10-year-old midsize SUV is worth 16.5 percentage points more now than five years ago (retaining 32.5 percent of its value in 2017 vs. only 16 percent in 2012). Midsize cars, on the other hand, are selling for an average of just 0.6 percentage point more than five years ago (retaining 22 percent of their value compared to 21.4 percent in 2012).

"You often hear that the value of a new car drops dramatically the moment it's driven off the dealer's lot, and that's more true than ever right now," Drury said. "The surge in popularity of leasing has led to a more disposable mentality about personal vehicles, which has taken a toll on the values of newer used cars."

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