When deciding whether to purchase a car, people usually look at their own situation. They think about whether they can afford to buy a car and how badly they need one. They rarely look to macroeconomics for guidance. According to price trends, though, now is a great time to buy a used car. Here's a look at the economic trends and causes.
Prices Have Been Dropping
Since May 2014, prices on used cars have been dropping. As this interactive chart from CarGurus shows, used-car prices peaked in mid-May of last year and have steadily declined since then. In late 2014, a couple of the automakers tracked on the chart saw their used-car values increase slightly, but this was a short-lived run. Since January 1, 2015, all of the manufacturers listed have seen a drop in the prices of their used cars.
Prices Rose in the Great Recession
This trend is a correction to inflated used-vehicle prices during the Great Recession. According to Larry Dominique, who heads up research on used-car values at ALG, used car prices are returning to their usual values.
Used-car prices rose during the Great Recession for three reasons. First, many people could not afford a new car because they weren't making as much money as they once had. There was an influx of drivers looking for pre-owned vehicles, and the increased demand drove up their value.
Second, the U.S. Government reduced the number of used vehicles on the road through its Cars Allowance Rebate System (CARS), or Cash for Clunkers. An article in Time reports that 360,000 new cars were sold through the program, which means just as many used automobiles were sent to the scrapyard. The diminished supply further increased prices of pre-owned vehicles.
Third, fewer three-year leases were signed in 2009 than previous years. In another Time article, Brad Tuttle notes that only 1.5 million vehicles were leased in 2009. This was a 25 percent drop from 2008's lease figures, and it paled in comparison to the 3.4 million leases made in 2002. A chart from Edmunds.com shows that leases quickly recovered after 2009, with steady growth through 2012, at least.
The decreased number of leases did not immediately affect used-car values, but in three years there were only 1.5 million formerly leased vehicles available as pre-owned models. In other years that figure had ranged from 2 to 3.4 million.
Economists Predicted This Price Drop
With the Great Recession in the past, Economists predicted that used car prices would begin falling in 2014. In January 2014, Auto News said that industry analysts thought used-car prices would drop by between 8 and 10 percent in the coming years.
Over the past year, the value of pre-owned cars has dropped because the three trends that led to their increase have been reversed:
- unemployment is at a post-Great Recession low of 5.6 percent, Trading Economics reports
- Cash for Clunkers was almost six years ago
- This year, 2.5 million formerly leased vehicles are expected to be for sale, Tuttle says
The reversals of these three factors have led to the decreasing price trends that CarGurus' graph shows. As of January 2015, the cars they track have fallen between 5 and 9.5 percent from their May 2014 highs. Prices are approaching the range that economists predicted almost a year ago.
If you're considering buying a used car, all of this data suggests now might be the perfect time to do so. Your individual circumstances might dictate otherwise, but the macroeconomic data points to buying one now. Prices have been dropping, and they're almost as low as automotive economists expect them to go.
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