Why Used Cars Could Get a Lot Cheaper Very Soon

A coming surge of used cars could mean bargains for buyers -- but automakers are worried.

Apr 27, 2014 at 2:31PM


The leasing experts at ALG saythat the Chevy Camaro holds its value better than other cars in its class. Used-car values have a big effect on automakers' lease deals. Photo credit: General Motors.

Want a nice used car? You might want to wait a little longer.

According to statistics from used-car auction giant Manheim, about 1.7 million vehicles came to the end of their leases and entered the used-car market last year.

That's a low number, and short supplies have kept used-car prices high. But that number has already started rising -- and that means used-car prices could be coming down soon.

How new-car leasing affects used-car prices
Why do leases matter to the used-car market? If you go shopping for a typical "nice" used car -- one that's two or three years old, and has maybe 30,000 miles on it -- odds are that you'll be looking at a lot of cars that just came off-lease.

About a quarter of new vehicles were leased last year. Most of those will hit the used-car market when their leases are up, making their way through an auction network, like Manheim, to dealers around the country.

But back in 2010 and 2011, fewer new cars were sold at all, because many consumers were still recovering from the recession. And a smaller percentage of the cars that were sold were leased, because lenders were still being stingy in the wake of the banking crisis. Leases made up just 19% of retail new-vehicle sales in 2010, and 20% in 2011.

These are the cars that have been coming on to the market during the last year or so. It's why supplies have been tight, and used-car prices have been high.

But as the economy improved, more new cars were sold. New-vehicle sales in the U.S. were up 13% in 2012 and up another 7.6% last year. That means more used cars are coming. Manheim expects 2.1 million off-lease cars to hit the market this year, and says that could rise to 3 million or more by 2016.

This is good news for used-car shoppers -- but it's not so good for the automakers.

Why automakers are worried about the surge of used cars
Strong used-car prices have probably helped new-car sales during the last couple of years. After all, if a used model costs almost as much as a new one, you might as well buy the new one, right?

They've also helped in a less obvious way, by making leases on new cars cheaper. Lease prices are set using "residual values," which is an estimate of what the new car will be worth at the end of its lease. If used-car prices are strong, residual values will tend to be high -- and automakers can offer lower lease payments.

That's a big deal, especially in market segments where leasing is very popular, like luxury sedans. General Motors (NYSE:GM) has made a big effort to improve its residual values to help make its lease offers more competitive -- in part, by limiting discounts on its new cars. That will also benefit the owners of those cars, of course.

Improving quality also helps. Ford's (NYSE:F) residual values have risen as its models have improved, something that will benefit GM as it follows the same path.

But residual values will take a hit as more used cars flood the market -- and new-car sales could be hurt, as well, as low-mileage used cars start to look like greater bargains.

How automakers and consumers can benefit
Of course, the automakers are already thinking about ways to turn this trend to their advantage -- or at least to limit the disadvantage.

One way: certified used cars. Expect to see automakers find ways for their dealers to buy up more of the best used cars, so that they can be offered as "certified" with an extended warranty. 

That will help cushion the blow for the automakers (dealers pay automakers to participate in the certification programs), while helping to keep used-car prices somewhat strong. And these certification programs can give buyers who are nervous about used-car shopping some piece of mind.

But there will still be plenty of bargains out there -- for those who are willing to be patient for a little while longer.

Special free report for Motley Fool readers: 6 stocks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong, time, and time, and time again, with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently, one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information