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In today’s topsy-turvy car market, the normal rules no longer apply. This might be your best chance to forego the used lot and finally buy new.
Appreciating Depreciation
In a tough car market, where inventories are low and demand remains high, finding a “good deal” can be difficult. As we noted last month, depreciation can be a key factor for finding value on your next car purchase, whether you’re buying new or used. Currently, depreciation rates are historically low, meaning used cars are losing less value over time than is typical. For those of you who’ve dutifully kept to the used market in search of the greatest overall value, the calculus may have changed and buying new might finally make financial sense. Here’s why.
Low depreciation rates are a double-edged sword for buyers. Since cars are a depreciating asset, a low rate means you’ll retain the value of your purchase longer. Our top 10 list of cars that hold their value is a good place to start if you want to have decent resell value later on down the road.
The flip side of low depreciation rates overall is this, used cars aren’t necessarily the peak value in the market they usually are. The value proposition that used cars have typically represented, particularly those in the two- to five-year-old range, no longer holds true today. Normally, a 30-50 percent market value depreciation rate is a steeper curve than the mechanical depreciation of the vehicle. That means two- to five-year-old vehicles still have a lot of life left in them, and their drop in market value doesn’t perfectly overlap with their expected mechanical lifespans.
But, thanks to the microchip shortage and resulting low inventories, the used car market is on fire. Used car prices have steadily risen (they are, in fact, a leading indicator of overall inflation) and depreciation rates are low. The gap between new and used just isn’t what it used to be.
You can seek value in vehicles that will retain value and just eat the higher than usual price tag. This approach will mean, when prices do inevitably come back down to earth, you take less of a hit. The other option is to go ahead and buy new.
Why Buying New Makes Sense Now
Typically, our best advice when car shopping is to do the above, seek out optimal value by buying a lightly used example that is 2-3 years old, having taken a depreciation hit but still retaining considerable mechanical life. But what if there is little or no depreciation to take advantage of? This is indeed what we are seeing in today’s car market. Used examples of hot models like the Kia Telluride, Toyota Tacoma, Tesla Models Y and X, and others are often selling at or above the current MSRP of new examples. That’s right, not only is depreciation zero, the lack of inventory for new cars has, in some instances lead to actual appreciation. That’s a word usually reserved for only the most desirable supercars and the rarest of collectable cars.
There are two things to keep in mind if you’re going to buy a new car rather than a used one. First, scarcity and demand mean some models will be prohibitively expensive right now. New cars that have seen major markups in price during the pandemic include the Jeep Wrangler, the Ford Mustang, the Porsche Macan, and the Chevrolet Corvette. These vehicles are commanding a price often 20 to 30 percent over MSRP. Yikes! Avoiding some of the very hottest models may be necessary if you want to maximize the value on your new car purchase.
The other thing to keep in mind is patience. The global supply chain is a bit of a mess right now, and as long as it remains tangled companies will have a hard time getting goods in the hands of consumers. While many car shoppers like to be able to drive off the lot in their new car, getting a good deal on a new car will likely mean having to wait for it. Waitlists for some models are now months long. Heck, Ford is saying they aren’t even taking new Maverick orders until next summer. Buying new in today’s market will demand being patient and willing to compromise on features, color, and even which model you settle on.
Despite all this, today’s weird car market can justify what we’ve all secretly pined for, the rare moment when buying new over used makes perfect financial sense.
