🚨 What's different about the recent spike in car prices
Plus, what's the "right" mileage for a used car?
Today’s topics:
🔑 Shoppers corner: What’s the right mileage for a used car?
🚨 Exclusive market insight: What's different about the recent spike in car prices
Reading time: about 3.5 min
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🔑 What’s the right mileage for a used car?
Used car shoppers ask: what is the right mileage for a car? It is one of those questions where the answer is not that simple.
First and foremost, mileage is dictated by how much you are willing to spend. As I recently tweeted, vehicle values typically take the biggest dips when a factory warranty expires, and then again when a vehicle hits 100K miles (of course, there are always exceptions). While the first dip makes sense, the second one is purely psychological.
When does a used car take its 1st significant hit in value?
When the manufacturer’s warranty expires.
2nd significant hit?
When it hits 100K miles.
After that?
You’re better off holding onto the car forever.
— CarDealershipGuy (@GuyDealership)
Mar 3, 2023
Factory warranties vary by manufacturer, with some offering a powertrain coverage that typically lasts longer than the initial new-car bumper-to-bumper warranty. For example, Volkswagen only offers the 4 year, 50K mile bumper-to-bumper, while GM offers the 3 years/36,000 mile bumper-to-bumper and 5 year/60K miles powertrain warranty.
Then there are certified pre-owned cars that extend the warranty period for a few years and mileage allowance, alleviating the risk of costly repairs.
Ideally, you should be looking for a used car that has either a balance of the original manufacturer warranty, a certified pre-owned (CPO) warranty, or a third-party warranty that is transferable from the current owner.
Proper maintenance and care are more important than just mileage. A newer abused and neglected car with 40K miles is a worse purchase than a well-maintained and carefully driven car with 80K miles.
Manufacturers’ dependability reputation also comes into play. I would be comfortable buying a Toyota 4Runner with 90K miles, but I would be somewhat nervous about a Land Rover Defender with 60K miles, given their current reliability reputation.
In summary, there’s no universally “good” mileage. When shopping for a used car, optimize for warranty coverage, proper care and maintenance, and brand reputation.
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🚨 What's different about the recent spike in car prices
Wholesale car prices have been declining all last year, but in a surprise move for everyone, prices jumped by another 4.4% in the first 2 weeks in February, the largest February increase since 2009. Prices have been creeping up in the previous two months as well, so we cannot dismiss it as a random blip anymore.
Source: BlackBook
Cars are appreciating again and this presents problems for both dealerships and consumers. Here’s why:
Ask any dealer and they will tell you that appreciating wholesale prices is a phenomenon we haven’t seen since the craziness of 2021. There hasn’t been a tax season where we’ve seen wholesale prices for mainstream, bread-and-butter cars at $3K above the “book value”. [Book values are current wholesale and retail market price estimates provided by various publishers, such as NADA, Kelly Blue Book, Black Book, JD Power, and other companies]
Look at this example from a recent sale at an auction:
A 2016 Honda Civic LX with 68K miles was listed with an auction value of $15,800 and sold for $16,100. The J.D. Power book value is listed at only $12,925 for clean and $12,050 for average conditions. This is a 7-year old Honda Civic we are talking about. See what’s wrong here? While wholesale prices have been increasing for 3 months, book values haven't caught up yet!
This is just one example, but as other dealers can attest, it is an increasingly common occurrence.
Dealers are paying above retail for used cars https://t.co/1NRVKuOvz7
— CarDealershipGuy (@GuyDealership)
Mar 5, 2023
When auction (wholesale) prices are above collateral values, here’s what happens:
Dealers struggle to make a profit, and thus, sell a car: There’s no “water” (industry term for profit or ‘spread’) in the deal from the get-go. Lagging book values certainly hurts dealer margins, but there’s another issue:
Inaccurate book values hinder dealerships’ ability to secure financing for consumers because lenders use book values to underwrite loans(!)
Even if a lender is willing to accept the 120% loan-to-value ratio, it would still require a large down payment of ~$5K to secure a loan. Faced with increased delinquencies, lenders want to take less risk and charge dealers more for each loan, further squeezing dealer margins.
Consumers in the prime credit segment don’t need to worry, but those in subprime and deep subprime should expect it to become increasingly difficult to get into cars.
We are in for a bumpy ride: the outlook for subprime shoppers is bleak, and dealers are facing additional headwinds from higher wholesale prices, lack of inventory, and inaccurate book values.
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