The Financial Crisis is Why You’re Paying More for a Used Car

Posted Kirill Ougarov Market Analysis

I have seen a number of stories about how the price of a used car is approaching the territory occupied by the rent (too damn high, though for cars, receding). As with the rent level, a finger can be pointed at the 2008 financial crisis, the echoes of which we’re still feeling and will be feeling for years if not decades to come.

In the case of the car market, as many as 20 million vehicles were eliminated from the supply between 2008 and 2015 due to reduced demand. This assumes that the market would have remained at the 16.6 million unit pace it had been running at from 2004 to 2007, which of course is a huge if, but that’s why this is just an academic exercise. That said, any organic decline would have surely been less severe than the cataclysmic collapse of 2009-2010 and the accompanying funeral moods at auto shows. In fact, compared to the four-year cohorts that bookend it, 2008-2011 was smaller by almost a full year’s worth of sales. You can see this dip in blue line the above annual sales chart, which is the average for each four-year cohort. If sales had remained at the 2004-2007 average, the orange bars would all be near the gray line.

us-annual-vehicle-sales-2004-2015-four-year-cohorts

Given that 99% of cars decrease with age and we mortals can’t afford the 1% that don’t, the newest used cars are also the priciest by default. When there are fewer of them, demand will naturally drive up the cost or shift to a more-affordable segment (thus increasing its value instead). Until 2015, supply of prime 3-5 year old cars was depressed by several million units. The last of the depressed years will be cycled out of prime come 2018, but with average car age at 11.5 years (in 2016, that’s the 2004-2005 model year), the crisis-caused supply crunch will be leaving an impact on the overall used market beyond 2020.

Edit: Someone brought up Cash for Clunkers Facebook. I didn’t feel like bothering it, but since it’s come up, I’ll copy/paste my response:

The total volume of cars traded in was 690k, which is negligible compared to the supply decrease. Additionally, the impact was partially offset by increased demand, so the net negative impact was even smaller. Further, most of the cars traded in were 90s SUVs, minivans, and pickups near the end of their useful life even in 2009 and not an impact on anything but the bottom end of market from 2012 onward.

Edit 2: The permabears at zerohedge just touched on this very issue, once again assuming that the sky is falling. By only looking at the post-crisis volumes, they’ve overstating the impact of Cash for Clunkers (for their own political reasons) hiding the larger picture that current volumes are a reversion to the pre-crash mean. Accounting for population growth, the new car market could easily peak near ~18m/year in 2017-2018. The rise in credit is pent-up demand from 2008-2012 being belatedly satiated. By 2020, the curve will look vaguely like:

submarine-surface

The worrying part is that despite all that, overall growth is barely breaking 2% because the velocity of money continues to slow.

1 Comment on “The Financial Crisis is Why You’re Paying More for a Used Car

  • Kevin B. says:

    Awesome insight. I’ve seen that this late-decade, new car sales trough accounts for the surge in Service and Parts business as the cars age and fall out of warranty.

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