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.
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.
Chart 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.