Your car is now worth less than you think

The Oklahoman (Sunday) - - BUSINESS - BY KYLE STOCK Bloomberg

Car sales in the U.S. have been ris­ing for seven con­sec­u­tive years now, and it’s dent­ing the value of what­ever is cur­rently parked in your garage or drive­way. With so many new cars rolling out of deal­er­ships lots and in­stantly be­com­ing used cars, the sec­ondary mar­ket is glut­ted and the pace of de­pre­ci­a­tion is rapidly ac­cel­er­at­ing.

Your not-that-old car might not be a clunker quite yet, but it’s prob­a­bly a lot closer than you think.

The av­er­age used car lost 17 per­cent of its value in the past 12 months, drop­ping from $18,400 to $15,300, ac­cord­ing to data from Black Book, an auto an­a­lyt­ics com­pany. That an­nual de­pre­ci­a­tion fig­ure has been in­creas­ing steadily, too. The av­er­age used car to­day de­pre­ci­ates nearly twice as fast at it did in 2014, when the an­nual rate was just 9.5 per­cent.

“We’ve got our­selves in an over­sup­ply sit­u­a­tion,” said Jim Hal­lett, chief ex­ec­u­tive of­fi­cer of KAR Auc­tion Ser­vices, which sells about 5 mil­lion used cars every year. “No­body is in­ter­ested in stock­pil­ing in­ven­tory right now.” Trans­la­tion: If you’re trad­ing in a used car, don’t expect to get much of a deal.

Cer­tain seg­ments are shed­ding value even more quickly. Sub­com­pact cars, such as the Honda Fit, and large sedans, such as the Chevro­let Im­pala, are de­pre­ci­at­ing faster than av­er­age. Big SUVs, vans, and pick­ups are hold­ing their value a lit­tle bet­ter, and im­ports tend to drop more quickly than do­mes­tic mod­els.

Glut, both new and used

The prob­lem, of course, is supply. Seven con­sec­u­tive years of in­creas­ing U.S. auto sales have put a glut of ve­hi­cles on the road. 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.

Au­tomak­ers, hav­ing added man­u­fac­tur­ing ca­pac­ity, are also of­fer­ing larger in­cen­tives on new ve­hi­cles just to main­tain their record sales mo­men­tum. That puts down­ward pres­sure on the en­tire mar­ket, ac­cord­ing to Hal­lett, even for used cars.

Con­se­quently, the num­ber of driv­ers who are up­side down on their car loans is surg­ing. Amer­i­cans are pay­ing — or try­ing to pay — 108 mil­lion auto loans at the mo­ment, ac­cord­ing to the most re­cent Fed­eral Re­serve data. That represents roughly half of li­censed driv­ers in the U.S. At the same time, 14 per­cent of Amer­i­cans have a neg­a­tive net worth. Among those who have more debts than as­sets, the Fed­eral Re­serve says auto loans make up be­tween 10 per­cent and 23 per­cent of their to­tal fi­nan­cial obli­ga­tions.

Not sur­pris­ingly, KAR Auc­tions is see­ing a ris­ing num­ber of repossessions. The com­pany ex­pects nearly 2 mil­lion ve­hi­cles to be seized by len­ders this year and added to the used-car mar­ket, up from 1.1 mil­lion at the nadir of the last re­ces­sion.

The in­creas­ing pace of de­pre­ci­a­tion is also bad news at the cor­po­rate level. Com­pa­nies with huge fleets of cars and trucks — think deal­er­ships and rental chains — are see­ing their bal­ance sheets tick down by the day. Con­sider Avis Bud­get Group: In the quar­ter ended June 30, the rental-car em­pire man­aged to rent more cars than in the year-ear­lier pe­riod, and at fairly sta­ble prices. Yet its profit dropped 92 per­cent as it strug­gled to sell ve­hi­cles it wasn’t us­ing. Ex­penses tied to ve­hi­cle de­pre­ci­a­tion and lease charges in­creased 12 per­cent in the quar­ter.

Hal­lett at KAR Auc­tion said many fleet man­agers are in a sim­i­lar pickle. At Hertz Global Hold­ings, for ex­am­ple, de­pre­ci­a­tion per ve­hi­cle was up 27 per­cent in the re­cent quar­ter; at the time, Hertz had 500,000 ve­hi­cles. “We call it los­ing money by vol­ume,” Hal­lett said.

Avis, in re­sponse, has re­sorted to sell­ing more cars di­rectly to con­sumers, cut­ting out the mid­dle­man at deal­er­ships to re­al­ize slightly higher prices. And it’s buy­ing fewer 2018 mod­els as it gears up for next year.

The up­side is that Amer­ica is in the midst of a buyer’s mar­ket for used ve­hi­cles. In 2012, the av­er­age three-yearold ve­hi­cle was sell­ing at 26 per­cent off its orig­i­nal sticker price on Car­gu­rus. com, an on­line plat­form list­ing some 2.5 mil­lion ve­hi­cles. A three-yearold car is cur­rently trad­ing at a 34 per­cent dis­count from the sticker price, said Car­gu­rus spokes­woman Amy Mueller.

A cheap used car hasn’t been this cheap in quite some time.

[AP FILE PHOTO]

Chevro­let Corvettes and other ve­hi­cles line the lot at a Chevro­let deal­er­ship in Rich­mond, Va.

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