Customers look for new cars, but buy used

[rickaren]

Customers look for new cars, but buy used

Posted Monday, Mar 23, 2009, 11:47 am in Employee News

After leasing six new cars, Kim Greenspan decided to buy a used one—an increasingly common decision in the sour economy that is contributing to a decline in new vehicles sales and an increase in used car prices and trade-in values.

“I have children—two little girls, 4 and 7—and I have to spend money on them,” said the 45-year-old Bloomfield Hills resident, who replaced a leased Jeep® Grand Cherokee with a low-mileage 2007 Ford Edge.

Economic uncertainty, tighter credit standards and stronger warranties on nearly new vehicles are luring price-conscious, credit-squeezed consumers away from new cars and trucks to used ones.

Last year, more than 13 percent of new car shoppers left dealerships with a certified used vehicle instead, up from 8.3 percent in 2003, according to CNW Marketing Research in Bandon, Ore.

While new car sales are expected to decline to as low as 10.1 million this year, from dismal sales of 13.2 million in 2008, CNW is forecasting that used vehicle sales will grow through 2012. This year, the firm forecasts used car sales of 40 million, up 9.5 percent from 2008’s weak volume of 36.5 million.

Already, 42 percent of dealers are reporting low inventory of used vehicles as a result of the trend, according to a March survey by Wachovia Securities analyst Rich Kwas. He added that was the highest level recorded in the past three years.

‘A positive development’

Strength in the used car market is a good sign for the battered new vehicle market, which has forced Detroit’s automakers to close plants, lay off workers and seek federal assistance.

Historically, strong used vehicle sales eventually translate into improved new car sales.

There are several reasons.

Higher used car prices mean better trade-in values for consumers. They also can make new models a better relative value.

What’s more, higher resale values for used cars—or residual values, as they are often called—also mean improved lease rates for the future. Lease rates are based on the estimated future value of a vehicle. So, the higher the expected future value, the lower the lease rate.

As gas prices peaked over $4 a gallon last summer, the resale value of SUVs and other large vehicles plummeted. That forced automakers to increase their lease rates. Chrysler Financial stopped leasing altogether.

“People used to have sticker shock. Now they have payment shock,” said Tarik Daoud, owner of Long Family Auto Center, which previously was a new vehicle dealership that sold the Ford brand. The Warren, Mich., business recently decided to sell used vehicles instead.

During a conference call to announce its February new vehicle sales fell 48 percent, Ken Czubay, Ford’s sales and marketing vice president, pointed to growing used car prices as “a positive development.”

“In theory, if used cars and prices firm up, they should be supportive of new car sales,” he said. “However, the market is fragile and it would be too dangerous to extrapolate a short-term positive trend. But from a dealer point of view and from our point of view, this is positive.”

Dealers who’ve been struggling with plummeting new vehicle sales are increasingly turning to used cars to help support their businesses.

Dealers know they will make a bigger profit on selling a 2- or 3-year-old car than on selling or leasing customers a new one. Edmunds.com market analyst Joe Spina attributes this to “imperfect information” in the used vehicle market.

“Any consumer can go to our Web site and see what the dealer paid for a new car,” Spina said. “There’s no easy way to know what they paid for a used car at auction.”

With gas prices averaging less than half of last summer’s peak, dealers also are moving larger SUVs and trucks, which traditionally have greater profit margins.

“We’re seeing an increase in prices on sport utilities and bigger vehicles that used to be shunned when gas was selling at $3.50 a gallon,” said Carl Galeana, president of Galeana Automotive Group, which operates Van Dyke Dodge in Sterling Heights and Chrysler, Saturn and Kia dealerships in metro Detroit, South Carolina and Florida.

“A 2006 Jeep Commander that was going for $10,500 at the auction,” he said, “is now going for about $12,800.”