Used Vehicle Market Report - Special NADA Edition

So far 2016 is shaping up to be yet another record year for used vehicle values and CPO sales.

The market is flush with off-lease vehicles that are coming back to dealerships. This trend was noticeable last year and now will be even more pronounced since 27.1% more cars were sold via three-year leases in 2013 compared with 2012.

These young off-lease cars are pushing the average used car age down; in 2015 the average used car sold at a dealership was only 4.4 years old. (In 2014, 2013 and 2012 the average was 4.6 years old.)

In 2015, 55 percent of used cars sold at dealerships were three years old or younger. We expect this percentage to grow in 2016.

Only five segments are expected to make up 66% of the lease returns in 2016. Interestingly, some of the less popular segments in today’s market were the most popular leased vehicles in 2013: midsize cars, compact cars and entry luxury cars (first, second and fourth in lease volume for 2013, respectively).

On the other hand, the very desirable compact crossover SUVs and midsize crossover SUVs ranked third and fifth in lease volume in 2013. For all of 2016, fuel costs have been projected to remain stable around the current low level. This will give consumers who are on the fence about buying a truck or SUV further reason to purchase in these segments, fueling demand and increasing values.

Many off-lease cars are being sold through Certified Pre-Owned programs, which list for an average of about $1500 more per car than a traditional used car. The high volume of CPOs in the market mix is helping to boost the industry average used car transaction price.

In 2015 the average used car sold for a record of $18,552 and we anticipate that the average will remain high in 2016 due to the CPO trend mentioned above and consumer interest in more expensive vehicles including trucks and SUVs.

To help compensate for these increasing transaction prices (especially for trucks and SUVs) the term lengths will undoubtedly increase as most used car buyers prefer to make loan payments of less than $400 per month.

Used car bargain hunters may benefit from another market trend: much near-new inventory is coming from car rental agencies whose vehicles are generally in service for a year or two and then dropped back into the marketplace. Rental agencies purchased about 1.8 million units in each of the years 2012, 2013 and 2014, and increased their purchases to about two million units in 2015.

Most former rentals are concentrated within the segments of midsize car, compact car, subcompact car and large car, and are often distinctly different in terms of content and mileage from off-lease or consumer trade-ins.

Based on the influx of this inventory and the expectation of low gas prices, Edmunds predicts that average prices will continue to fall for these segments.

Note to Dealers: Trade-Ins are Down, but Some Are Worth Chasing

In 2015, only 47.6% of new car sales involved a trade in (down from the recent high of 49.7% in 2012 and 48.3% in 2011.) The trend of new car shoppers keeping their older car is consistent with data from other strong economic periods like in 2005 when trade-ins only occurred in 39.3% of new car sales and in in 2006 when trade-ins only occurred in 39.9% of new car sales. Our research shows that when shoppers feel good about the economy, many tend to consider keeping an older car -- perhaps passing it along to another family member -- rather than squeezing every penny out of it to put toward a new car.

Why does this matter for dealers? Not all trade-ins are created equal in today's market. Some are worth pursuing in hopes that shoppers can be convinced to part with them. Edmunds.com has identified five used car segments that today have average selling prices that are significantly higher than in recent years. Here are some segments, their average selling prices in 2015 and the increase over 2014.

These segments are very popular with shoppers right now because of low gas prices, and fuel costs are not expected to rise in 2016 so this trend is likely to become more pronounced through 2016.

Conversely, there are some segments that haven’t seen price increases or aren’t experiencing nearly as much lift in pricing. Here are some examples of trade-ins that may not be worth a dealer's effort in the current marketplace.

Dealers who use Edmunds’ MyAppraise tool have fast and easy access to all the critical information about a trade-in even before a car shopper comes onto the lot. The shopper simply enters his or her vehicle's VIN into the tool and answers a few simple questions about its condition, then will be prompted to take pictures of the vehicles to give dealers the ability to verify the vehicle's condition and provide a more accurate estimate. The responses, photos and customer-contact information are delivered to dealers who can then respond with a specific quote via mobile text messaging. About 500,000 people use the Edmunds site every month to appraise their vehicles, and this number is expected to rise in the coming year.

Some valuable used vehicles are easier to find than others. Lease returns are making up a huge volume of used cars in the marketplace today. The most popular leased segments three years ago and their recent average sales price by model year are:

On the other hand, these popular leased segments are not bringing quite as much value when sold off-lease.

For those less lucrative segments, it may be especially worthwhile for dealers to certify them as CPO cars, or, if their mileage and condition render them ineligible, sell them through Edmunds.com's Used+ program which provides many of the peace-of-mind elements of CPO including roadside assistance and extended warranty supplied by Edmunds.com through a third party. The Used+ program also provides a free gas card with every purchase.

Here's the difference in average list price and average miles for CPO vs. non-CPO: