Hurray for Depreciation! Used-Car Prices Should Be Getting Cheaper

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The Great Recession caused the usual marketplace for new and used cars to go a bit haywire. Normally, a new car depreciates substantially the moment it’s driven off the lot, with cars sometimes losing as much as 25% to 30% of their value within a year’s time. But when the economy collapsed and consumers turned en masse to used cars to save money compared to leasing or buying new, demand for secondhand vehicles skyrocketed, with prices reaching highs not seen in decades. At times, what with new-car incentives and soaring used-car prices, there were screwy instances of new cars being cheaper than used models. Things should be getting back to normal in the days ahead—meaning that used cars will be less expensive down the line.

Studies have shown that used-car prices have gotten less expensive in recent months, with the average secondhand vehicle selling lately for 2.4% less than in May. Analysts expect the trend to continue, with used-car prices declining in the months and years ahead.

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The most recent ALG Industry Report points out a “softening” in consumer demand for used cars. Thus far in 2012, the new-car market has been exceptionally strong, with especially outstanding sales totals in February, March, and April. Naturally, the used-car market hasn’t been quite as hot, the report states:

The percentage of dealership transactions attributable to used car sales has been steadily declining since January. Since their peak of nearly 65% in 2010, dealer used car transactions have been eclipsed by new car transactions as a percentage of total vehicle sales.

In August, the ratio of new-to-used cars sold at dealerships was about 1:1. As demand for used cars falls off, prices will follow; ALG researchers predicts that used-car values will drop 4% to 5% over the next 12 months, and over the next two to three years, used-car prices should be 8% to 10% lower than they are now.

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One reason that used-car prices aren’t decreasing quicker is that there is a “relatively low levels of used market supply.” Because drivers have been hanging onto cars longer, because used cars have been purchased in large quantities over the past few years, and perhaps even because many used cars were taken off the roads thanks to the 2009 “Cash for Clunkers” program, the supply of used cars has been limited in recent times.

“The supply right now is so low, that is controlling everything in the used-market values,” Eric Lyman, ALG’s vice president of residual value solutions, told Automotive News. “There just aren’t enough vehicles out there relative to used-car demand.”

But as more consumers buy new cars, they’ll often be trading in used cars at the same time, pumping up the supply. Combine that with softening demand for secondhand models, and we have a situation in which used car prices—and expected depreciation for new cars—will “drift back toward historical norms,” according to the ALG report.

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Even as used-car prices are only be creeping downward slowly, the gap between new and used car pricing grows swiftly. That’s because new cars, increasingly featuring pricey technology and better fuel economy, are getting more expensive:’s Kicking Tires blog notes that the average new car sold last month for $2,338 more than a year ago.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.