It's No Longer Bad To Own or Sell a Used Car

But Disappearing Stigma of Used Cars Means Higher Prices

Photo (c) Austin/Getty Images

The National Automotive Dealers Association in its first quarter report for 2016 made this interesting statement: an improved attitude toward used vehicles in general (among both consumers and dealers) lifted average wholesale prices to an all-time high.

Let that sink in for a moment. Both consumers and dealers are becoming more accepting of used cars.

Consumers Accepting Used Cars

Technically this has always been true because the ratio of used cars to new cars sold annually is usually about 2.5 to 1.

Where the difference is, though, is the acceptance of more expensive used cars, i.e. certified pre-owned.

People are willing to pay a higher premium for these cars for the peace of mind they provide in terms of a strong warranty and the overall excellent condition of the cars. You’re not going to leave the dealer’s lot with any dings. You know if something goes wrong mechanically six days, six months, two years down the road, it is going to be fixed at little or no cost to you without any hassles. (It’s the latter sentiment – without hassles – that makes manufacturer certified pre-owned programs so popular and other non-manufacturer CPO programs not.)

Another reason consumers are going to grow more accepting of used cars, in spite of increased prices as explained below, is the new car market is going to continue to make the used car more attractive from a price point.

As the NADA explains in its report, dealers can expect to see further changes in used vehicle wholesale and retail prices as the market transitions from a period of incredible strength to one stressed by growing used vehicle supply, higher interest rates and, in all likelihood, larger new vehicle incentives.

The more money manufacturers put on the table for new cars, the more used car prices drop. The thinking is you can’t charge more for a used car than you can a similar new model – or you can’t be within striking distance of the two prices.

Plus another factor in improving consumer demand for used cars is the overall condition of used cars.

Mechanically, new cars in the last 10 years have improved significantly. Just simple maintenance can keep them running for 15 years or more. Consumers are less likely to be concerned about the condition of used cars. (But that doesn’t mean you shouldn’t know how to inspect a used car.)

Finally, increases in new car prices simply make used car prices that more amenable to a smart buyer’s budget.

Dealers Accepting Used Cars

That line from the NADA report almost suggests that dealers weren’t accepting of used cars and it’s true: they weren’t. Until used cars kept the lights on during the glum days of 2009 and 2010. That’s when dealers realized it was used cars – largely in the form of certified pre-owned used cars that were going to be their saviors.

Since 2007, the wholesale price of used cars has increased 18 percent. They’ve gone from about $12,000 in 2003 up to almost $16,000 in 2015. That’s a good base to build a living from.

Used car prices have risen significantly since 2007. The NADA reported used vehicle retail prices have also improved dramatically over the past several years, rising 17 percent from 2007 to 2015.

As mentioned in last month’s article, Used Car Sales in 2015 Showed Sharp Increase, Edmunds.com reported that 2015 was a milestone year that saw record high used car prices (an average of $18,600 per vehicle sold) and an all-time high for certified pre-owned (CPO) sales (2.55 million).

Doing some simple math you can see what makes used cars so attractive to auto dealers. The difference between wholesale average price and retail average price is about $2,600. That’s a margin of 16 percent. It’s not a profit margin of 16 percent because there are costs to prepare a used car for sale but it’s still a good margin especially compared to the new car market.

Edmunds.com reported in a 2013 article, “… the profit margin on a used car is typically more than what a new car sale can bring. NADA reports that at the average car dealership in 2012, net profit per new vehicle retailed was $111.” Don’t feel too bad for new car dealers because their profit comes from their service departments, where’s there is really little room to negotiate.

More and more, it’s all about certified pre-owned cars.

The used car industry is on target for 2016 to see 25 percent of all used cars sold be certified pre-owned. That explains why, as Edmunds reported, 54 percent of used vehicles sold in 2015 were 3 years old or younger. The heavy influx of lease returns weighs the average age of used vehicle sold down to 4.4 years old from the previous year’s 4.6.

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Griffin, Keith. "It's No Longer Bad To Own or Sell a Used Car." ThoughtCo, Aug. 23, 2016, thoughtco.com/its-no-longer-bad-to-own-or-sell-a-used-car-3983937. Griffin, Keith. (2016, August 23). It's No Longer Bad To Own or Sell a Used Car. Retrieved from https://www.thoughtco.com/its-no-longer-bad-to-own-or-sell-a-used-car-3983937 Griffin, Keith. "It's No Longer Bad To Own or Sell a Used Car." ThoughtCo. https://www.thoughtco.com/its-no-longer-bad-to-own-or-sell-a-used-car-3983937 (accessed November 18, 2017).