Automobile Value

As discussed in class, an automobile value depreciates as soon as it’s driven off the lot. A recent study using iSeeCars.com puts a number to that depreciation.  Analyzing 15.7 million cars over the course of the year, the study finds the average car value loss is 17% of its value in the first year.  However, individual models differ in their value loss.  At the top of the spectrum, the Hyundai Genesis loses 38.2% of its value in the first year.  cargraph

The study cites demand as a function of reliability, popularity compared to competitors, dependability, repair costs, and redesigns.  Thus, many of the factors the study believes determine demand cannot be estimated until at the time of the purchase, making resale value more difficult to gage.  The drop in value after the first year corresponds to a potential savings of $16,000 if the consumer purchases a slightly used model.  Consumers have the option of buying a new car with little knowledge of its reliability or waiting a year to purchase a slightly used car with more information in one hand and savings in the other.  One significant part of demand, though, is aesthetics.  By waiting for a slightly used car, the consumer runs the risk the manufacturer may introduce a newer model.  In a society centered on “keeping up with the Jones,” newer models make the option of a slightly used model unappealing to some consumers.  On the other hand, not all cars depreciate at this magnitude, making a slightly used model less of a deal.  The study found some models lose less than 10%, such as the Subaru Impreza which lost just 3% of its value in the first year.  In the end, knowledge concerning the difference in value of a new and a used car can be extremely beneficial for the consumer.

Source:https://www.washingtonpost.com/news/get-there/wp/2015/01/21/the-best-bargains-for-buyers-looking-for-lightly-owned-used-cars/

UsedCarsChart by the Prof using data from the auto auction firm Adesa. These data are raw averages of varying mixes of vehicles. Tom Kontos, their chief economist, analyzes this in much greater detail, by brand, like-vehicles, with seasonal corrections and on and on.

The overall declining trend is a reflection of the Great Recession: no leasing and few sales of new cars and lower incomes led to a dearth of used vehicles amidst greater demand for generally less-expensive used vehicles. That effect lingers but has largely worked its way through the system. You can though see changes by category, e.g. trucks vs smaller cars.

6 comments to Automobile Value

  • barnettt18

    This article highlights the diversity of value changes among cars over time. With increased understanding of cars’ value after one year of use, they can make more informed decisions when purchasing their next car. It will be beneficial to use statistics like these on a global scale in order to reduce imperfect information and make a perfectly competitive market.

    Thomas Barnett

  • adamsm19

    This article helps to explain why firms, notably General Motors, have begun to scale back on fleet vehicles. The slightly used fleet vehicles, depreciated during their time of service, are quickly resold as used cars and compete with brand new models. Consumers can reap the benefits of a purchasing a gently used car if they are willing to wait for even a few months.

    • More important for depreciation rates, they compete with used vehicles from all other sources, normal supply-demand analysis means used car prices thus fall.

  • manleya18

    I think this article is particularly interesting because it highlights the difference in some examples of consumer and producer preferences. For example, producers are always working on producing the next model and aiming to engineer the best car that matches or exceeds the car of competitors. This “keeping up with the Jones’s” in the producer and manufacturing world leads to increased profits- whoever can produce the best vehicle the fastest will ideally sell the most cars. On the other hand, while some consumers prefer to always have a new and fashionable model of a car, others cannot afford, don’t care about, or are unaware of style changes from year to year. In that respect, the customers who care less about new models benefit because slightly used cars will always be significantly cheaper if producers continue to come out with new models quickly.

  • Barrett Snyder

    I’d be interested to see how well performance-oriented vehicles depreciate in relation to other more mainstream vehicle models. You could make the general assumption that they would initially depreciate much more rapidly than say a Camry once they are driven off the lot and no longer “new,” but would likely retain value much more consistently over time and perhaps even increase in value once they become collectible for their limited production nature.

  • This is a neat topic, because it should be obvious to all that the physical depreciation of a car, the rate at which it wears out, is not the same. So this economic depreciation is, as Lizz’s post and the comments above note, is at least in part a strategic variable that car companies can influence.

    I’ve added a graph to the post – the configuration of W&L’s WordPress implementation doesn’t allow me to add to comments.