And the issue with buying a new car versus one that is a year old, if you could find the one you wanted, is if that one year of brand new car experience is worth an average of about $9K. Put that way I have to seriously think about looking for a one year old new car as my next vehicle. (My only issue is worrying that a car that was sold after only one year may have a lemon selection bias.)
You purchase a previous lease.
I love leases. When I go to buy a 3 year old car (after the biggest chunk of the depreciation is gone) I have a nice pampered low mileage vehicle. It’s had it’s 3 month oil and fluid changes, and most leases have strict mileage rules so it’s not like it’ll have over 100,000 miles on it. So it’s essentially new with all the bugs worked out of it.
While I agree that in most cases buying a new car probably costs more than buying used I feel the savings is usually not any where near what people claim. Then - If you factor in the peace of mind of owning new, your time and inconvenience while a car is being repaired, and the fact that buying a used car is a huge PITA the savings doesn’t seem like much to me.
Anytime you buy a car at retail and sell at wholesale you are going to take a huge loss. If you spread the retail/wholesale loss over three or five years it is a big difference from taking it all in one year. Another trick the “Used is way better than new” crowd likes to play is ignore rebates and incentives and use the MSRP even if the car sells for much less than MSRP. Still 32%? :dubious: (see my examples below)
If I am reading your second quote right it claims a cars value drops by 14.5% per year for 4 years, for a total of 58%? Whenever I browse 5-6 year old cars they seem to be selling for around 50% of the cost of a new car - and the new car is usually an updated and improved model. For example, 2006 mazda6 $12,899. New 2011 Mazda 6 $21,900. If my math is right a 41% drop over 5 years and the new car is a redesigned and improved model. Both prices are Edmunds True Market Value (TMV), retail prices and I used the top of the line model.
http://www.edmunds.com/mazda/mazda6/2006/tmv-appraise.html?sub=hatchback&style=100664796
I think the biggest reason cars depreciate so much in the first year is the Lemon/repo factor, even though the first year drop isn’t as bad as most people claim. These are two posts I made a little over a year ago, so the numbers might be a bit off. These are cars other people selected and I see 1 year costing $4000 and $1600, much less than what most people claim.
According to Edmunds, on average, people are paying just over invoice for that car. Then there is a $3000 incentive, making the new, out the door price $23,700 including destination. That would be about 17% depreciation, assuming you pay retail for both cars. To me the best year of a cars life and the uncertainty of how the car has been treated for that year is worth more than 17%.
Not sure if the link depends on my browser – http://www.edmunds.com/new/2010/chev....html?action=2
Sorry for continuing the hijack but a 2010 focus SES also has a $3000 incentive and goes out the door for just over invoice, out the door price ~$15,600. A 2009 focus ses goes for about $14,000. To me, Jaw dropping that somebody wouldn’t pay the extra $1,600 for a brand new car.
All prices according to edmunds.com
For all those that bothered to quote me, I will repeat:
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Technically, the long-term ownership case is stronger than the case for leases**
See that?
But… people being people, if they want new wheels every couple of years, well… it’s kind of like a bunch of other crap we all do that isn’t the right thing FINANCIALLY, but we do it anyway.
Philster, certainly I appreciate what you said, and was merely pointing out that often individuals do not appreciate how much they are spending for that particular desire and balancing against the utility of using the same money for satisfying other desires.
Anachronism, you do understand the difference between anecdotes and data?
Some cars depreciate less quickly than the numbers that the comprehensive study in my cite stated was average, and some more quickly. Yes, you can find used cars that depreciate more slowly and retain more value and new cars that have great incentive packages. Are you trying to argue that your finding several examples of that proves the comprehensive survey reported averages to be false? Really?
As to your other point, I cannot say whether or not the numbers used in that survey represented asking price or actual sales prices (including rebates) and agree that a fair analysis would be based on actual average sales prices, not MSRP.
I am also not sure how this site bases its calculations, but using its calculator a new car that cost $28,500 would lose, on the low end $5,130 to a high end of $7,980 in the first year and $9,989 to $15,367 over 3 years, whereas the next 3 years would cost from $5,571 to $6,401 more. So roughly between $4,400 to $9000 is what people are valuing the utility of driving in a new car every 3 years, as opposed to owning the same care for 6 years, according to that site. (Feel free to calculate something in for possible increased repairs costs, although my own experience has been that years 3 to 6 are pretty minimal.) Not so far off from the $6,000 to $8,000 of my first cite. (Albeit the first year depreciation comes to only 18 to 28% there.)
Again, that may be a rational decision for the pleasure it brings, and individual purchases may not meet the average case (better and worse cases both), but it is difficult to make a rational choice without being aware of what the numbers are likely to be.
Except you are technically wrong, and leases are in fact better.
I don’t think he was arguing that it disproves the claim, but he was merely expressing skepticism at the figure. And he is absolutely right to. I suspect that figure is vastly inflated as well, based on my own experiences in car buying.
So let’s do a statistical experiment. Since you are claiming the average depreciation of a car is 32% in the first year, why don’t you go find us a handful of 1-year old cars for sale (say about 5-10 cars picked at random and not cherry-picked) which are in excellent condition with low mileage - no more than ~15k miles since that is the average for a year’s worth of driving - along with the price the seller is looking for. Then we’ll compare those prices to realistic sales prices (not MSRP) for the same models new.
How much you wanna bet the discrepancy will be a lot less than 32%?
The popping of the housing bubble should be a good wake up call for people to start examining their economic assumptions a bit more closely - past performance is not a guarantee of future results.
A number of factors over the last decade or so have contributed to the pricing of cars. A huge factor is economically questionable overproduction by the US domestic car makers, who are under various union and regulatory pressures to produce large numbers of dubiously useful cars which are then sold for little if any profit, often to fleet operators. This is a big aspect of why domestic vehicles are often seen as having worse resale value than imported vehicles. Going by MSRP this is true, but by actual transaction price, as you’ve indicated, the numbers are often very different, especially once things like subsidized financing (in the truest sense of the word - the banks that did this were all eventually bailed out by taxpayers) which don’t easily show up in straight MSRP to resale price comparisons. The various countries that import cars to the US, such as Japan and Germany, have long operated under regimes that offered at least implicit subsidies to their export car industries, an artificially weakened currency being the most prominent. The result of this is that there has been a consistent oversupply of new vehicles to the US market up to the recession that started in 2006.
Here’s the situation in 2011: GM and Chrysler have both gone through bankruptcy and restructuring, and are now much leaner companies with proper supply chain and inventory management that has substantially cut down on the amount of incentives needed to keep production down and inventory flowing. Plants have been closed, workers laid off, brands and models have been axed. The days of GM churning out massive numbers of Cavaliers and Malibus to dispose of at a loss are gone. The whole industry also saw a massive loss in sales in 2008-2009, where new vehicle purchases ( i.e. the supply to the used car market) collapsed from ~14m units to ~9m units (rough numbers from memory). Now the industry has seen another supply shock from the Japanese earthquake that pulled another chunk of new inventory from the market. The on-going recession also means that more people will be shopping in the used car market, while the new car market has largely adjusted its supply situation to reduced demand. Many of these buyers will be repeating their knee jerk behavior seen in 2008 when fuel prices last rose and pay $8000 for 15 year old 3 cyl Geo Metros and otherwise bidding up the price of used subcompact vehicles, a vehicle class that historically has never been popular.
All these factors are massively driving up prices in the used car market. It is my opinion that buying a used Japanese car, especially a Honda or Toyota, is possibly the worst decision you can possibly make, car wise, as of this time.
Except that he isn’t, from a financial POV. Most of the cost of a owning a car is in its depreciation and that depreciation is front loaded. Financially a three year lease loses out to six year ownership. The question is only if that cost is worth it. And as a matter of financial planning, buying a quality used car that is three years old, say off of its lease period, (of the same characteristics, mpg etc., as the new car under consideration) and driving it for many years into high mileage, makes the most sense, in most years, unless the individual places a very high utility on having a low mileage vehicle and experiencing that new car smell.
Rig I’ve provided a cite that claims to have comprehensively done that and another one that suggests lower first year depreciation but a similar difference in the cost of depreciation for years 1, 2, and 3 vs. years 4, 5, and 6. Feel free to provide a cite that contradicts those numbers. Or do a comprehensive study of it yourself and report back (no, not just five that pop into your head).
Indeed in a particular year for particular models certain used cars may be in high demand. This year there is more demand for more gas efficient vehicles and fewer can afford new cars than usual.Yes, atypical supply and demand can distort historic norms. The difference between a 2008 Honda EX with automatic (bought at a dealer in “excellent” condition) and a 2012 model, for example, is only $3K right now. (And per Kelly Blue Book, only about $6K bought privately in “good” condition.) And new cars may have significantly better mileage than some even only three years old.
As I mentioned above when I browse cars 5-6 years old they usually cost around 50% what a new car cost. My experience certainly contradicts all these claims of crazy amounts of depreciation. These studies that show ‘data’ never seem to show how the data was calculated so I am going to be skeptical.
I did not ‘cherry pick’ cars looking for exceptions that held their value better than average. I have noticed this with many cars and only bothered to calculate the numbers on a couple. (If I was cherry picking I would of used the mini cooper :eek: ) The Mazda 3 is a car I was interested in and the other two cars where being used as examples by other posters on how bad depreciation was. I don’t feel strongly enough about this to pick dozens of cars randomly to prove these studies wrong. If there is a study that shows how the data was calculated I would love to see it.
I shouldn’t have posted on a Friday, I don’t have much time to get on the computer on the weekend.
Down roughly 50% in value in 5 years … assume that to be true. The issue remains how much of that 50% loss is front loaded in the first 3 years vs occurring in the next 2. Or in year 1 as opposed the next 4.
Well, my second cite, the calculator one, came up with 18 to 28%, based on a new car price of $28,500 (and the same additional cost difference between owning for 6 years versus owning for 3) so your 17% over the first year for particular models that are known to retain value well may not be far off. That comes to $4,845 on a car that costs that $28,500 new that is known for low depreciation. You are aware of that and have made a choice that the experience of owning a car for its first year of life and being sure of how it was treated is worth that. Not an irrational choice but one that places a high utility on those two factors is all. You may also desire features and improvements between model years. And having the manufacturer’s 36K warranty cover all of your next 36K miles driven. There is also the fact that not many one year old used cars are available. There is group that were leased or fleet vehicles that are typically 3 years old, and the group sold after the average purchaser has owned them for five years.
My small point is that most are not aware of how much utility they are placing on those factors. If they aren’t considering them explicitly then they cannot make a rational choice.
There are actually several overlapping issues being discussed here.
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Buy (or lease) new or buy used? Again, that decision is based on how much utility one places on that first period of ownership, how much depreciation actually is (the 32% first year claimed by my first cite, the 18 to 28% of my next one, or the 17% of your specific example) and what the current market conditions for the specific used and new cars that you desire are. As above, even at 17% that’s a fair amount of value placed on the utility of that fist year of ownership.
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Own (or lease) for a new car for a three year period, then replace, or own for a longer period, say one year beyond the average of five years that most American new cars are owned, to six years? In that case the utility of not knowing how the car was treated is factored out, and your used car value is more likely to be closer to wholesale while your new car purchase is more likely to be full retail. Deciding upon that next three years being always a new car, rather than keeping the same car for another three years, places a very high utility that new car experience, again a person who spends that $28,500 on a new vehicle is placing the value of driving a car of ages new to its third birthday over the value of driving the car they have owned for three more years, at somewhere between $4,400 to $9000. Again, not necessarily an irrational choice, but I personally find it hard to believe that many really can’t find something else to do with that much money that brings more utility/fun than that difference (including investing it). Boy, I sure could.
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Given a choice of three year ownership does it make more sense to own or lease? Well we should be able to assume that you’ve negotiated the cap cost of the lease as well as you’ve negotiated the sale price of the car. And the best guess at residual value is the same, which forms both a large part of the cost of the lease and of the cost of ownership. The other financial part is the difference between the financing of the car vs. the “money factor” of the lease, a number that then gets multiplied by 2400 to become a figure that can be compared to a loan’s annual interest rate. Factor in if you are going to use a home equity line for a purchase and get the tax benefit or not. I suspect but do not know that the “money factor” is rarely more attractive than a loan of the same terms. Then there are various other considerations: the ease of turning it in vs. selling it, specific tax considerations, etc. Maybe a lease is more attractive then, maybe not. It would depend on all those specifics. Leasing though is certainly the easier option and that utility may be worth a bunch to many of this group.
Just wanted to clarify, that car was picked by someone else as an example of a car with high depreciation.
Chevy Malibu and Ford Focus are known to retain value? :dubious:
Sorry but when I read that post the numbers seemed to be in reference to the Honda Accord. My confusion I am sure but that was the source of the low depreciation comment.
Chevy Malibu? Kelly’s says expect to sell an '09 privately for $14,735 in “good” condition. (Most cars are in “good” condition and selling to a dealer would of course be less.) New an '11 sells for somewhere between $22,148 to $26,611. Figure lowish side of the middle, $23K. That’s 36% in two years. Yeah I suspect most of its five year depreciation is in those first two years.