If you're car shopping, you may have heard the adage that new cars lose 10% of their value as soon as you drive them off the dealer lot. A new report from CNBC and the automotive research firm Black Book should make car buyers feel a little better about their purchases. They found that the severe supply disruptions during the pandemic and other factors changed long-held car depreciation rules, perhaps for the long term. New cars, the study said, now retain roughly 10% more of their value after three years than was the case in 2019.
Car value trends
Several factors are disrupting the new and used auto markets, according to the study, which is summarized in a suite of videos.
First, we are not entirely free of the manufacturing headaches caused by the pandemic. With so few new cars available in 2020 to 2022, shoppers instead sought out used cars, raising those prices. At the height of this topsy-turvy auto market, one- or two-year-old used cars would often cost about as much as a new car, and many new cars sold over the MSRP, or dealer's asking price. In some cases, the value of used cars even appreciated in value. Although the chip shortage is now mostly behind us, parts and supply chain issues coupled with high demand continue to put the squeeze on car shoppers.
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Second, automakers are making fewer cars than they did at their peak in 2016, according to the study. Most automakers have focused on making higher-priced cars rather than churning out a lot of economy models. Manufacturers like the bigger margins that fancier, more expensive cars deliver. But that strategy translates to years of reduced inventory that fails to match demand, keeping prices for used cars higher.
Third, the average American car is getting older. As manufacturers build more reliable cars, consumers tend to hold onto them longer. Low turnover translates to fewer used cars on the market, further bolstering prices.
These three trends tend to mean higher prices at the dealership for used and new cars. For example, just when analysts thought the market had cooled for good in early 2023, used car prices rose once again, to 4.4% last April, fueled in part by tax refunds. As interest rates rose, prices cooled again until November 2023, when used car prices rose again, by a seasonally adjusted 1.6%.
How depreciation is slowing
Now for some good news for car owners. All that market disruption means that your new car is depreciating at a slower rate. Before the pandemic, new cars lost 50% of their value in the first three years. Now a new car will typically only depreciate by 40%.
What's more, the way we think about vehicle depreciation is flawed. Your car indeed loses about 10% of its value when you drive it off the lot, but that's due in part to the market accounting for dealer incentives, which are typically around 10%.
There are some exceptions. Exotic or rare vehicles may grow in value over time. Electric vehicles tend to depreciate quickly because the market prices in tax incentives, which may cut the price of a new EV by over $10,000. And certain brands, like Honda and Subaru, tend to hold their value better compared to others.
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