As Dan mentioned used car sales are down 6% in the first quarter of 2013. This is not good news for dealers. As we learned from our visit to the Valley Honda dealership used cars have higher profit margins than used cars due to asymmetric information. Its easy for a consumer to go out and compare new cars and not so easy to compare and evaluate used cars. Coupled with this the U.S. GDP is up 2.5% for the first quarter of 2013. While I wasn’t able to find any data on the proportion of used to new car sales as effected by GDP growth I would imagine during times of economic expansion new car sales would go up, both the overall number of cars sold and the percent of cars sold. Still I would expect used car sales to go up as well during an expansion. Of course that’s not to say that many other variables play apart in the sales. This post is more in search of an answer to how periods of economic expansion and recession correlate to used car sales.
During the recession new car sales dropped making the supply for used cars go down as well. As professor said, a car tends to go through 3 ownership changes in its useful life. During the recession though people began to hold onto their cars longer making supply for used cars to go down.
Along those same lines, dealers get incentives from HQ by selling new cars making it more appealing to lower prices that compete with used cars. This also means that the owners cars will be in warranty longer and know how the car has been taken care of since there was no previous owner. As much as I hate that fox on Carfax.com their commercials do make sense when saying slight water damage and the video of the car in the flood pops up to show what has actually happened.
I think this decline in used car sales is representative of the long term effects of rebates offered to stimulate new car sales during the recession. For example, with cash for clunkers, many consumers who may normally purchase used cars were given unique incentive to buy new cars. Some of the cars exchanged during that time might have been nearing replacement right around now and warranted more used car sales, but those people are instead still driving their new cars and won’t be in the market for another car for several more years. The used cars traded in were also taken off the market, meaning there is less of a supply of used cars than there is in a normal replacement cycle.