
A glut has used-car depreciation accelerating - yawz
https://www.bloomberg.com/news/articles/2017-08-21/your-car-is-now-worth-less-than-you-think
======
wbracken
Tangentially in the business. Two recent stories told to me:

1) Saw at Manheim Auto Auction (one of the largest) 300 Nissan Leafs run
through the auction line in one afternoon ahead of some of our cars. Drop in
"value" of leafs went down 10%+ in one day. All were recently off lease. 2)
For similar reason, Santander is holding 4000+ cars on auction lots "waiting
for pricing to stabilize". Reality is, when they run those cars through the
auction, they will have to book the full losses. Say they anticipated 20%
repossession rate and that they would get 80% on the dollar when auctioned on
those losses. When they run them through now and get 50% on the dollar, their
securitization pools will be creamed.

~~~
aphextron
Leaf is a special case because of the battery degradation issues. 100k miles
on a Leaf is basically end of life (unless you buy the $5k battery
replacement). That being said, you can pick one up in California for $5k in
perfect condition with <50k miles and ~75% of battery life remaining right
now. When you factor in zero cost of maintenance and zero cost for fuel over a
lifetime of 2-3 years, and HOV access, it's the single most perfectly designed
commuter car to ever exist IMO. I just bought one last month and it's the best
car I've ever owned. Having a bunch of free chargers nearby means my total
monthly cost to commute ~20 miles a day is a $75 insurance payment.

Definitely a niche thing for heavy urban areas that have the charging
infrastructure though. I can't imagine owning one in the Midwest.

~~~
NDizzle
75% battery life on a car that has a 90 mile range? Talk about range anxiety!
I'm not sure who looks at those cars, but they sure don't use cars like I do.

I don't even commute and I can't imagine the stress of driving something like
that.

~~~
aphextron
In the Bay Area it's never really an issue because of quick charging. 30
minutes gets you an 80% charge from 0. When you realize that point-to-point
the longest possible drive around here is ~40 miles, and there is guaranteed
to be a quick charger within a few miles of your destination, it changes
things. I admit it's a total mindset shift from driving an ICE but I love it.

~~~
kobeya
> When you realize that point-to-point the longest possible drive around here
> is ~40 miles

o_O

------
beejiu
In the UK, many cars sold in the past few years are under a so-called Personal
Contract Plan (PCP). These are basically sub-prime loans for cars where you
lease the car for the difference between its purchase price and its projected
depreciated value at the end of the term.

[https://www.theguardian.com/business/2017/jun/10/car-
loans-p...](https://www.theguardian.com/business/2017/jun/10/car-loans-
personal-contract-plans-vehicle-financial-crisis-pcp)

One of the UK regulators recently warned about the exposure to these loans.
"An initial fall in prices could lead to a surplus of used cars coming to the
market, which could further weaken prices and cause material losses to lenders
through their GFV risk."
([http://www.bankofengland.co.uk/pra/Documents/publications/re...](http://www.bankofengland.co.uk/pra/Documents/publications/reports/prastatement0717.pdf))

~~~
guan
British PCPs are very similar to the car leases that have been very common in
the United States for many years (in both prime and subprime markets). There
has been a lot of recent discussion about the risks associated with PCPs is
mainly because they are relatively new in the UK, and because they have grown
so quickly lately from almost zero. That means assumptions about the “residual
value” (to use the American term) of the cars at the end of the contract,
which are based largely on data from before PCPs became so popular, may not be
so accurate.

That’s probably less of a concern in the US, where the lenders have more
experience with these things, although car sales (and leases) have also grown
rapidly in recent years, so there is still something to worry about.

In both countries, as I understand it, it is the lender who loses out if the
resale value is less than rejected. So at least individual car owners are
somewhat protected, and the biggest risk might be having to return the car and
not being able to get a new lease/PCP with attractive terms.

~~~
djaychela
"That means assumptions about the “residual value” (to use the American term)
of the cars at the end of the contract, which are based largely on data from
before PCPs became so popular, may not be so accurate."

When you put it like that, it reminds me of the endowment mortgage situation
in the UK which led to people having serious issues at the end of their
mortgage term [1]. Obviously not at the same scale, but it'll still alter the
market considerably.

[1]:
[http://www.bbc.co.uk/news/business-20858236](http://www.bbc.co.uk/news/business-20858236)

------
justinph
Sure, as far as basic transportation goes, but you can't get the vastly
improved safety features in a used car that you can in most new cars today.
Buy a new Toyota? It comes with automatic emergency braking, collision
avoidance, blind spot detection, adaptive cruise control, and built-in backup
camera, standard. Buy a used 2014? It has none of that.

I just bought a new car for the first time in my life. The safety of those
features was worth the $10k premium for a new car.

~~~
donatj
Why is it worth 10k? Do you get in a lot of accidents? I genuinely would not
want any of those things, I don't want my car making decisions for me, I'm
smarter than it. On top of that it's just junk to break you can't fix.

I have never been in an accident.

I drive a pickup I paid sub $1000 for. Been driving it for three years no
issues. That $10k could buy me ten trucks.

Would I take it on a trip? No, I rent a car for less than a car payment.

In my opinion buying new vehicles is a foolish waste of money I could be
spending on something else.

~~~
letsgetphysITal
> I have never been in an accident.

Gambler's Fallacy. Prior incidence has no effect on future occurrence.

A lot of the new safety features are for low-speed collision protection,
automatically sounding horn and applying breaks when your car gets close to
another, say in traffic. Unless you go top-range you generally won't get
actual driving automation. Other than that it's just convenience; Climate
control instead of air con, reversing sensors and camera instead of (as well
as) mirrors and turning your head around etc.

~~~
oasisbob
Instead of barking the names of logical fallacies at people, perhaps consider
why the auto insurance industry employs scores of actuaries and takes driver
history into account so heavily.

~~~
bluGill
It is still a fallacy. Insurance companies don't look at someone who is 40
with no accidents and insure them for free because even the lowest risk
drivers get into accidents sometimes.

------
S_A_P
This bubble has been building for years now. Wholesalers and other exporters
have been hiding the problem for a while now, and but somethings got to give.
The problem is multifaceted:

1) Lease rates arent necessarily in sync with the used car market 2) Buyers
are keeping cars longer if they purchase 3) Subprime loans and buy here/pay
here dealers are multiplying.

THIS IS A BUBBLE. I wont call when its going to burst, and it wont be like the
housing bubble, but the fallout will be great...

~~~
gnicholas
Any predictions on how the popping bubble will ripple through the economy?
With the housing bubble, there was a huge pull-back in consumer purchasing, as
people lost hundreds of thousands of dollars in home equity. That caused a
drop in consumer confidence and purchasing, which led employers to cut back on
wages/hours, which led to further drops in consumer purchasing.

Do you think we'll see the same domino effect here, but just at a lower
magnitude? Or is there a different path for this bubble to ripple out through?
Perhaps when people lose cars they lose jobs that they can no longer commute
to?

~~~
S_A_P
I don't think that it will be as severe. The big banks are largely insulated
from this. I do think that it will be a buyers market for late model used cars
for cash buyers. I'm already seeing signs of this. It's just not quite there
yet but I bet I can get a car at 50% traditional market price soon.

~~~
bluGill
I think the banks as in the car manufacture's finance arms will be hit the
most: when it hit they are the ones who are suddenly owners of a car that they
owe more on than it is worth. They will have to sell these cars at a loss. If
they try to make up for that loss by raising lease rates those who turned
their car in will be forced buy a used car at greatly reduced rates (few have
the ability to afford much larger payments)

Those who buy their car have a known payment, they might owe far more than the
car is worth but that payment won't chance and other than an accident they
eventually have a paid off car. They might not be able to trade their car in
as soon as they would like, but they at least have a car.

~~~
S_A_P
Agreed. All the credit arms of the manufacturers will be hit hard. I didn't
mention this in my parent comment but you alluded to another great point. 60+
month loans can mean that those who drive more than 20k miles can use their
car up before it's even paid for.

------
mrfusion
I really found the opposite last month when I was truck shopping. The prices
at carmax weren't much lower than buying new. I even found one case where it
was cheaper to buy new!

I'm wondering if people hate the dealership experience so much they're driving
up the price of used cars?

I'm still just utterly confused by the used truck prices I was seeing.

~~~
damnfine
Trucks are used as work, and puzzlingly, luxury cars in the US. They hold
their value well because of the new standards seem to be making long term
maintanince harder and more expensive. Pre-DEF Desiel engines, Normally
aspirated V8 engines, Thicker sheet metal, Less sensors to replace over rough
use are a great example of factors making many used trucks sell for more than
new.

~~~
yuhong
My hope is that electric trucks will be more popular.

~~~
hueving
The higher power requirements make them pretty crappy when it comes to range,
particularly if you are actually using it to tow or carry something heavy.
Compare gas mileages of trucks to cars to see what I mean.

------
grecy
With many countries tabling laws to outlaw the sale of diesel and gasoline
cars around 2030, this is going to accelerate extremely quickly.

In 5 years (2022), everyone will know it will be illegal to buy a gasoline car
in just under 8 years.

I think there will be _very_ little demand for the regular old gas powered
car. (excepting maybe exotics, or "pleasure drives", which much be a tiny
fraction of overall sales)

That car you have to fill with liquid cancer is going to be worth _extremely_
little, very soon.

~~~
Hasz
Liquid cancer? C'mon, that's a bit extreme.

Getting down to the point, can you imagine the political fallout from crushing
the value of a gas car? It's a truck sized political landmine, and no party is
willing to touch that thing with a hundred foot stick.

Gas still has significant advantages that electric has yet to match. Worst gas
has 53x the specific energy of the best Li-ion, and even with a hundred %
efficient induction motor and a 10% efficient motor (try closer to 30%
realistically), gas is still a much more energy dense fuel.

Still, gas has a ton going for it. It's quicker to "charge" by an order of
magnitude; it's easy to carry an auxiliary supply to double or triple range.
Cold weather and reliability are excellent (hundreds of thousands of miles
with a minimum of maintenance). There are no concerns about cell wearout
(batteries will last for 5 years, _maybe_ ). Virtually everywhere on the
planet, there's someone in any population center who knows how to work with
gas cars.

The network for gas is highly developed and highly entrenched. No one is
giving up trillions in value without a fight. In all honesty, I expect to see
gasoline powered vehicles on the road for the next 100 years, barring an
unprecedented revolution.

~~~
maherbeg
I think you might be a bit off here on the extent to which the average driver
will be needing gasoline.

Tesla's have less than 10% battery degradation after 8 years so far.

What will happen is people will buy an electric car as a second car. They'll
get comfortable charging every night and then buy a Chevy volt like car that
usually won't need gas but can range extender as needed. A large portion of
those users will realize you don't even need the range extender most of the
time.

~~~
askvictor
More like 80-85% original capacity after 100,000 miles
([http://www.pluginamerica.org/surveys/batteries/tesla-
roadste...](http://www.pluginamerica.org/surveys/batteries/tesla-roadster/PIA-
Roadster-Battery-Study.pdf))

------
ProfessorLayton
Its looking even worse (Or better for a buyer) for electric cars. A cursory
craigslist search shows a 2014 Fiat 500e for ~7.5k @33k miles and Nissan Leafs
for as little as ~5k @42k miles. All with clean titles.

A used Model S 60 (2013) can be found for ~40k @60k miles, which I think is
good but not great, especially considering the quality issues early on.

I'm waiting to pounce on 1st generation electric cars that will be hitting the
used market when the Model 3 is mass produced. The reason I haven't bought yet
is that my current hybrid is fine and I expect used electric car prices to
drop even further.

~~~
ryandrake
As someone who at one point considered a 500e, why so cheap in the
aftermarket? Are they really falling apart this quickly?

~~~
winslow
Potentially. But I think it's also the fact that dealerships are leasing out
the 500e at $99 or even $59 a month for 3 year deals. So why even buy a used
500e when you can get a brand new one for <$100 a month or $1200 a year.

~~~
esaym
I doubt it is $1200 a year. More than likely the full coverage insurance would
be $100-$200 a month also.

------
loeg
Awesome. My 20 year old car is in great shape but it is getting older and I
will need to replace it sooner or later.

~~~
gozur88
Apparently you won't get much for it, then.

I'm kind of in the same boat, but I'd really like to get an electric model
that's been produced for a few years, which means there won't be much on the
used market.

~~~
hammock
You missed his point. He will wear out his car until it has no value then
gladly buy another used car at a great price.

~~~
gozur88
I didn't miss the point. That was a joke.

------
sbierwagen
The average used car costs $15,300? That seems pretty wild. Are the classic
Porsches that sell for $10 million dragging the average up?

~~~
adventured
No, that's about right. Take some time and go through autotrader.com. $15k
isn't unusual for a used mid-value sedan with ~25,000 to ~65,000 miles. For
example, look up Hyundai Sonatas, 2013, with that mile load, you'll see prices
around $14,000 to $18,000.

Or check out Toyota Camrys, 2012 model year. You'll typically pay around
$14,000 to $16,000 to get into one with 40,000 to 60,000 miles. So that's a 5+
year old car, a mid-value sedan, with a fair bit of mileage.

The average new car price is around $32,000.

~~~
sbierwagen
I don't disagree that you _can_ pay $15K for a used car, I doubt that the
_average price_ of a used car is $15K.

The average price of the first 30 used cars for sale by owner on the Seattle
craigslist is $5,896:
[https://seattle.craigslist.org/search/cto](https://seattle.craigslist.org/search/cto)

Average price of the first 30 _by dealer_ however, is $21,567:
[https://seattle.craigslist.org/search/ctd](https://seattle.craigslist.org/search/ctd)
But who would be dumb enough to buy a used car from a lot?

~~~
aianus
Why is it so dumb to buy a used car off the lot?

I bought an Audi off lease last year. It's still under warranty, free
maintenance (until 80k km), low mileage (37k km), fully loaded with options,
and I saved $20k vs a new one.

~~~
sbierwagen
Most used car dealers don't give you a warranty:
[https://seattle.craigslist.org/skc/ctd/d/2015-bmw-x5-35i-awd...](https://seattle.craigslist.org/skc/ctd/d/2015-bmw-x5-35i-awd-
suv-clean/6275678930.html) Note the conspicious absence of the word "warranty"
on this listing. If the car falls apart as you drive off the lot, you're out
$35K.

CPO cars have a warranty, which sharply limits your downside risk. Buying a
used car from a manufacturer is a much better deal than buying it from a third
party.

~~~
dionidium
_" If the car falls apart as you drive off the lot, you're out $35K."_

Obviously, cars rarely fall apart as you drive them off the lot. Yes, there
could be unexpected expensive repairs. But there's basically no realistic
scenario in which you're going to be out the entire $35k.

I understand that you're exaggerating for effect, but it's this kind of
thinking that convinces people to purchase expensive warranties that aren't
(statistically) worth the price.

------
ebyerly
Suckers! My car is already worthless.

~~~
jgh
you got some downvotes but I chuckled, so have an upvote.

------
KKKKkkkk1
If the rate of depreciation has increased, wouldn't that make price as a
function of age more convex than before? Meaning that _new car_ depreciation
is accelerating, but used-car depreciation is slowing down?

------
Glyptodon
Thank the gods we're no longer in that weird bubble from a few years back
where decent used cars were basically more expensive than new ones.

~~~
hkmurakami
Could you tell us more? Was this in some niche segments of discontinued but
popular models (like certain Subarus) or were run of the mill cars also like
this?

~~~
majormajor
I think 2012 was the peak of this, with some models literally being cheaper
out the door new than 1 or 2 years old.

[http://business.time.com/2012/03/22/when-new-cars-are-
cheape...](http://business.time.com/2012/03/22/when-new-cars-are-cheaper-than-
used-cars) [http://genxfinance.com/buying-a-new-car-may-actually-be-
chea...](http://genxfinance.com/buying-a-new-car-may-actually-be-cheaper-than-
a-used-car/)

Short version, a couple of things hit at the same time. I don't think Cash For
Clunkers was involved as those cars were much older than the 1-2 year old
ones, but it was more a factor of:

* shrinking new car demand in a post-financial-crisis buyer market that was very cost sensitive and had internalized the "cars lose 20% of their value the moment you drive them off the lot" type stuff, so started ruling out even cross-shopping new cars because they wanted to save money

* banks and dealers having more aggressive incentives and better loan rates on new cars (which is true even in non-recession-times, but they had to get more aggressive as new car demand dropped)

~~~
mrfusion
See my other comment but I still see this today! I was looking everywhere for
that mythical 20% off and saw nothing of the sort.

I'd love to find a bunch of cars just "driven off the lot" I could get that
discount on.

------
afinlayson
This may be temporary, as services like Uber/Lyft increase, and the
possibility of Autonomous Vehicles driving down the cost of those services.
This would cause the volume of new cars needed to dramatically fall, leading
to increased cost of those new vehicles. This would increase the value of used
vehicles that are currently priced in.

Would love to hear differing opinions :)

~~~
RhodesianHunter
"Would love to hear differing opinions :)"

Erm... A decrease in demand does not lead to an increase in price.

~~~
kbutler
Economies of scale apply in reverse as well, and reduced sales reduces the
number of items over which fixed costs can be amortized.

Decreased demand can lead to decreased production, causing further increased
prices and further decreased demand.

If the market clearing price rises above the demand curve, production ceases.

~~~
RhodesianHunter
'Decreased demand can lead to decreased production'

Not can, does. You're moving further down the supply curve.

'causing further increased prices'

No... less demand leads to less supply at a lower optimum price.

~~~
kbutler
> No... less demand leads to less supply at a lower optimum price.

Not always.

If I make fancy handkerchiefs, and I can sell 2 per month, I will make 2 by
hand and charge a high price.

If there is demand for 100,000/per month, I'll develop a way to mass produce
them and charge a lower price per handkerchief (which may further increase
demand.)

But if demand fades, I won't be able to sustain the equipment/workers that
produced the 100,000/ month, and if I continue to produce any, it will
probably drop back to a higher price, even at a lower demand.

This can occur because of consumer surplus and differing marginal demand. At
the mass-producing volume, people who are willing to pay 100x for the product
get what they need for a price of 1x. The marginal consumer gets it for
exactly the price he is willing to pay.

All those less motivated customers drop out at the higher price which is
necessary to support a limited production, leaving the 100x customers paying
at their maximum price, because no supplier can profitably produce that small
an amount for a lower price.

For example, obsolete technologies may increase in price as demand goes down.

------
SilasX
Hah! Just yesterday I was remarking how car gluts don't translate into lower
consumer prices because the government quickly props up demand:

[https://news.ycombinator.com/item?id=15064436](https://news.ycombinator.com/item?id=15064436)

~~~
brigade
The opposite really; cash for clunkers mostly just moved existing demand
forward a year without increasing it in even the medium term. Rather, it _did_
put a lasting dent in the supply of used cars, artificially increasing used
prices.

------
tempestn
Ever since that pg post, I can't help thinking about how much of a role PR
plays in stories. Did Black Book and Cargurus just happen to get mentioned
here? Or did they reach out to the journalist, or vice-versa? Did they pay for
the privilege? (Doubt it, but possible.) Always tough to know, since the best
PR is subtle enough that you at least wonder whether it was involved at all.

~~~
ctack
Please link the pg post.

~~~
tempestn
[http://www.paulgraham.com/submarine.html](http://www.paulgraham.com/submarine.html)

------
olivermarks
As understand it, too easy autoloans and resulting past buying/leasing
saturation are a big issue - a pessimistic view on zerohedge:
[http://www.zerohedge.com/news/2015-04-08/auto-loan-bubble-
en...](http://www.zerohedge.com/news/2015-04-08/auto-loan-bubble-endgame-used-
car-prices-have-stalled)

------
jedberg
I just bought a new van. It was rediculously easy for me to get a loan for
105% of the retail price (and I didn't even pay retail). I opted not to get
the full loan for obvious reasons.

But the fact that I could is frightening. There will be so many people
underwater on their loans.

The car bubble is coming and it's going to pop hard.

~~~
jogjayr
I thought anyone who finances a new car is underwater as soon as they drive
off the lot. Don't new cars depreciate something like 20% the day you buy
them? EDIT: I was wrong it's closer to 9% [1]

[1] [https://www.edmunds.com/car-buying/how-fast-does-my-new-
car-...](https://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-
value-infographic.html)

~~~
rlanday
Depends how big of a down payment you make.

------
kevin_thibedeau
> What’s more, an increasing share of those sales came with a lease, so
> there’s now a rising tide of machines flowing back onto the market when
> their three-year contracts run out.

Hopefully the 1%'s lobbyists won't figure out how to plug this loophole in
their rentier serfdom.

------
rawrmaan
Interesting that this has nothing to do with ride sharing (or at least the
article doesn't cite that as a reason). I think autonomy and ride sharing will
drive used cars nearer to the value of scrap metal within the next 5 years.

~~~
TheAdamAndChe
Your comment displays the incredible social and economic compartmentalization
between the Silicon Valley/tech hubs of the country and everywhere else. Uber
is not a viable alternative to vehicle ownership for the majority of places in
the country, particularly in poorer and more rural areas, and likely never
will be. When you've got to drive 20 miles to reach town, ordering an Uber
doubles the time required to get there.

As far as automation goes, in the consumer market, I highly doubt it will be
anything more than a rich person's luxury for a good long while, since most
people can barely afford a $10k vehicle, let alone a $100k one.

~~~
rawrmaan
I appreciate your comment. I definitely didn't see it that way until now but I
think you're right.

------
jgh
checked the KBB for my car back in may and it said $10k (2010 a4), checked
again last month and it was down to $8500. I'm not really depending on the car
to retain any value at all, but it's interesting to see how quickly that price
is dropping.

~~~
aidenn0
KBB on my car dropped 60% in the past 18 months (10k to 4k).

------
eveningcoffee
Does it have something to do with QE?

Car leases commonly rely on some expected value at the end of the lease. Even
when it is some relatively down played value then this information means that
it would become even lower.

This should also then mean that the lease should become more expensive.

Eventually lack of information should cancel itself out.

------
hydrogen18
We need another cash for clunkers deal immediately!

~~~
jessaustin
When Trump announces this in January 2020, his reelection will be assured...

/s

------
ng12
Actually it's not because I don't think about the value of my car. It's not an
investment, it's an expense.

~~~
jrs95
This is true, but the value of your car plays an important role in that
expense. And expected depreciation is an important factor to consider when
buying a car.

~~~
volkl48
That's only if you intend to sell it for more than scrap value some day.

Any car I buy is getting sold to the junkyard for $500 in 10+ years and 200k+
mi. How steeply it's paper value declines between now and then doesn't matter
much to me.

~~~
totalZero
True. And in all reality, this is great for consumers and bad for holders of
inventory.

There's a tendency among people in business to mark everything to market. This
helps avoid otherwise hidden losses but it doesn't actually make sense in some
situations. For example, in the case of a family that owns two cars and
replaces one every five years.

