How long are people keeping their cars in this economically challenging time?
After trending down from 2015 to 2018, thepercentage of people who keep their cars for longer or buy used cars was already trending up in 2019. This trend may be accelerating as a result of the recent effects of the coronavirus. Covid and the subsequent quarantine has presented challenges for the economy overall, and the automotive industry is one that has been impacted in a multitude of ways. Manufacturing plants have halted production while retail sales environments are not conducive for shopping. Due to the quarantine, people have been driving a lot less, but they seem to be getting out more now that the country is opening back up in many places. Buying decisions are impacted by the uncertainty of the coming months. All these factors have caused many people to choose to keep their car rather than spend more or incur more debt.
More significant increases have occurred when the economy trends down, as seen here in with the “.com” bubble burst combined with the 9/11 tragedy that caused decline in 2001 and the housing crisis of 2008.
According to Wards Intelligence, U.S. medium- and heavy-duty new truck sales dropped 48.5% in May 2020 compared to May 2019. With May 2019 sales totaling 46,595, 2020 sales totaled 23,974.
The Impact of The Economy on Buying Habits
With loss of income, people are more likely to save their cash and avoid accruing unnecessary debt. Buying a brand-new vehicle can have a significant negative impact on both. New cars lose 10% of their value in month 1, 20% of their value in the first 12 months, and 10%/year in subsequent years. With an average cost for a new car of over $36,000 this means that in year one there is $7,200 lost to depreciation and after 5 years your car is only worth $36,000. Buying a 2-5 year old car can be a great way to save 30% to 50% over the cost of a new car while still getting a later model vehicle. It also means owners whose current vehicle is 2-3 years old may feel more comfortable keeping it for the long haul rather than trading it in for a new or newer one.
Since Covid, People Are Driving Less
Although temporary, with families being quarantined at home and most destinations being shut down traffic has been virtually non-existent even in the larger cities. As the country re-opens, people will begin to get back on the road for commuting, visiting family and friends and road trips that seem to be on the rise this summer.
A recent analysis of the change in requests for directions on map applications such as Apple Maps show that driving, walking and transit direction requests dropped about 50% lower than they were in January and February. While people are still avoiding public transportation, walking and driving directions are back up-which could be good news for the auto industry.
Auto Industry Response
American, European, Japanese, and South Korean automakers have continued to make strides introducing new and exciting vehicles. In the electric car industry Chevy, Kia, Tesla and Porsche (to name a few) have introduced some exciting new models as well. Of course, these advancements were put in motion before the quarantine and have contributed significantly to interest in new car sales. In fact, Tesla is leading the market in sales growth while most manufacturers declined in Q1 of 2020.
Source: Automakers/Clean Technica
However, manufacturing shut down worldwide beginning in March (https://www.nytimes.com/2020/03/18/business/economy/gm-ford-fiatchrysler-factories-virus.html) which means that new car inventory will be very low in the upcoming months until production gets back into full swing. As a result, demand for previously owned vehicles will continue to rise and likely get an additional push from the less stable economic conditions.
Auto retailers adjusted rather quickly to quarantine by shutting down showrooms, offering no contact sanitary test drives and purchase processes. Now they are wearing masks as they open showrooms. Dealers have cut new car prices as well as interest rates, but maybe not quite as much as buyers have been holding out for. STATS If you are in the market it can be a good time to buy new or used, but don’t expect large discounts for every vehicle. In fact, in some cases, used car prices are going up.
Rising Used Car Prices
As new car inventory supply falls below normal levels used car prices can rise. Buyers may end up paying more for used cars until the manufacturers are able to ramp up new car production and distribution. The Manheim Used Vehicle Value Index has risen 4.4% compared to 12 months ago.
3-10 Year Old Models Are Still High Tech
Bluetooth, back up cameras, crash prevention, seat warmers, and a host of other amenities found on new cars have been around now for 10 or more years. In many cases, cars that are only 3 years old compare well to the newest version. Even advanced safety features such as ABS brakes, all-wheel drive, traction control, back up cameras, hands free phone and stereo control, remote controls, driver assist, and more are either standard or common options on used cars.
Used Car Repairs and Maintenance Costs
When people experience a loss of income, they are more likely to “put off” repairs on their cars, because they cannot afford a repair that costs more than $400. On the other hand, as more people keep their used vehicles, repair shops become busier and begin to price fix on what they can charge the consumer. Late model used cars can still generate a lot of revenue for the auto repair shops, and as they become more in demand, they have to raise prices and hire more mechanics. Most newer model cars require special tools and diagnostics that only car repair service providers can afford, which means that “DIY” opportunities are getting fewer and fewer.
Used Cars Are Less Likely to Have a Warranty
One of the downsides of buying a 2-5 year old car is that it has either run out of warranty or will soon run out of warranty. While regular maintenance is expected, most people cannot afford to pay more than $400 for a mechanical repair. If a major breakdown occurs, they may be left stranded, unable to pay thousands for an engine, transmission or other major issue. In many cases people must go into debt to fix a major repair. Most people do not dump a few thousand dollars into a car before they sell it or trade it in. They are more likely to trade it in just before they must spend money on it,
Two common solutions to managing tight budgets are aftermarket vehicle service contracts (VSCs) and mechanical breakdown insurance (MBIs) programs. What many think of as “extended car warranties”, VSCs and MBIs can help people feel more comfortable about buying or keeping slightly older cars. Some, like olive, provide monthly payment options that help used vehicle owners avoid expensive repairs receiving the same benefit they would expect from a new car manufacturer’s warranty.
At olive, we have seen significant growth in used car vehicle service contracts and mechanical breakdown insurance (often referred to as “extended car warranties”. Not only have sales of programs for used cars increased, but our customers are feeling more and more comfortable with our online quoting and purchasing tool resulting in continued growth of online only sales where the customer does not have to engage with our customer advocates during the sales process.
May 2020 vs. June 2020 VSC and MBI Sales for Used Cars
- Sales Volume Increase: 75.36%
- Online Only Sales Volume Increase (no other contact pre-sale): 14.04%
olive’s finance partners, Paylink Payment Plans, LLC, which provides payment plans for vehicle service contracts states they have seen “continued double digit increases in sales over the last 10 weeks in comparison to the same period in 2019 and we observed an increase of nearly 20% in June of this year.” States CEO Rebecca Howard.
Consumers Becoming More Risk Averse
MBI and VSC provider olive has seen a few interesting trends in the “auto warranty” industry. Increased risk aversion means consumers do not want to worry about expensive car repairs yet lack of income stability means they cannot afford the high price of a major auto repair. “We have many customers who choose a lower price but a higher deductible of $250 or $500 so they can get the coverage they need at the price they can afford, while not having to worry about a major mechanical repair that drains their savings or increases their debt.”, Customer Advocate Team Manager, Jerry Schimmer.
Good News – Buying Used Cars is Getting Easier
Due to Covid many dealers started delivering cars to customers after navigating the buying process on the phone and online. Online only used car companies are like Carvana and Vroom are providing 100% online used vehicle buying, selling and financing. Online buying and selling nationwide means more options for buyers and sellers and less concern about paying too much for a car.
There simply has not been an easier time to shop for and buy a previously owned vehicle online.