You can save money by buying a used car, but their prices have been high over the past few years due to two factors: the number of new cars sold and the age of new-car trade-ins.
According to Ricky Beggs, editorial director at Black Book, which provides vehicle trade-in valuation, 60 percent of new-car sales involve some sort of trade-in. The more new cars sold, the greater the number of used cars.
From 1998 to 2007, annual U.S. new-car sales never fell much below 16 million units. But in 2008, sales fell to 13.4 million, and to 10.6 million in 2009. Things improved slightly for 2010, when 11.7 million units were sold. Sales have gradually rebounded, with 2013 new sales breaking the 16 million mark for the first time in six years.
The dearth of new-car sales over the past few years has slowed used-car depreciation, according to Beggs. Before the recession, on average, used cars lost between 15 and 18 percent of their value annually. Last year, prices declined by 12.8 percent. For the coming year, Beggs is forecasting that figure will be 13.5 percent.
Before the recession, the average trade-in was between 2 and 5 years old, according to Black Book. After the recession, the average trade-in was between 8 and 11 years old. This led to a shortage of late-model used cars and high prices. In fact, in the past couple of years, prices for some used models were so high, it was cheaper to buy them new than used.
Given this past year's brisk sales pace, prices should ease in the coming year. But some segments will depreciate less than others. For example, don't expect any bargains if you're considering a compact pickup truck. Black Book predicts this segment should have the highest residuals of any segment after 36 months. Similarly, full-size pickups should hold their value well, Beggs said.
Other vehicles that should hold their value well: compact crossovers, such as the Honda CR-V, Toyota RAV4, Chevrolet Equinox and Ford Escape; and compact SUVs, such as the Jeep Wrangler and Nissan Xterra. Their popularity stems from their size; despite their category, these vehicles are no longer compact.
However, Beggs is concerned that entry-level cars might depreciate rapidly since all manufacturers are rushing to meet stricter federal fuel economy standards. Meanwhile, many midsize cars have been redesigned in the past two or three years and, while they have grown in size, they also have improved in fuel efficiency. The difference in price — about $2,000 — is not enough to prevent buyers from choosing a midsize car over compact or subcompact. As a result, many new subcompact and compact models have huge incentives to stoke buyer interest, which is crimping residual values.
Looking ahead, Beggs predicted another year of 16 million new-car sales. If that holds true, look for used-car prices to ease even further over the next year or two.