On the used side, Brown said the used Tiguan SUV is one of his hottest sellers, because after a few years of depreciation, it competes well with competitors like the Honda CR-V which had a bigger price advantage when they were new. “The VW has no squeaks or rattles, the car is engineered well and the vehicle really moves well,” he said. “After three or four years, the price difference is not that much.”
Experian Automotive raised some concern about a wide gap between the average new-car payment and the average used-car payment, in an August report on second-quarter auto finance data. The average new-vehicle monthly payment was $483 for the second quarter, versus $361 for used — the widest that gap has been since Experian began publicly reporting the data in 2008.
The difference between the average amount financed is also rising, Experian said. For the second quarter, the average amount financed for new vehicles was $28,524, versus $18,671 for used — a difference of $9,853. A year ago, the difference was $9,171.
The wider gap between new and used is bound to cause at least some new-vehicle buyers to think twice and consider a used vehicle instead, said Melinda Zabritski, senior director, financial solutions for Experian Automotive.
“That’s going to take at least some consumers in the direction of used cars, especially CPO,” Zabritski said, referring to certified pre-owned cars. “We think there’s an inventory shift in used, with off-lease cars coming back into a strong used market,” she told AFN.
It’s true that some shoppers consider both new and used, said Jessica Caldwell, senior analyst and director of pricing and industry analysis for Edmunds.com. In an analysis of second-quarter online shoppers on the Edmunds.com site, about 6% indicated they were shopping both new and used. About 40% said new-only, and 54% said used-only, she told AFN in late September.
It makes sense that buyers could see certified pre-owned cars as an acceptable and more affordable alternative to either a new car or an uncertified used car. “Anecdotally, people are image-conscious, shall we say,” Caldwell said. “Say you can’t afford a new Mercedes-Benz or a BMW, maybe if you want the BMW 3-Series, you buy CPO.”
For the whole U.S. market, CPO sales were about 1.7 million year to date through August, according to Autodata Corp., Woodcliff Lake, N.J. That was an increase of 10.4% from the same period a year ago, Autodata said.
The industry is experiencing a big increase in lease maturities. Those “nearly new” used cars, which on average are three years old, are a prime source of certified pre-owned cars, analysts said. In 2015, lease maturities are expected to be about 2.6 million, an increase of about 19% from 2014, according to Tom Webb, chief economist for Cox Automotive. In 2016, the increase is expected to be even greater, up 22% to 3.1 million, he said.
Eventually, the increase in supply is expected to lower used-car prices, and that could make used cars more tempting for new-car shoppers, analysts said.
Joe Derkos, director of consulting and analytics at J.D. Power and Associates said that point is still a long way off. “Until we see that increase in used-car supply put pressure on used-car prices, I wouldn’t expect to see that new-to-used shift,” he told AFN in a phone interview.
Dealership transaction data from the Power Information Network shows that customers who come out of a vehicle they bought new and switch to used are in the “low single digits” as a percent of the total. “That’s the best proxy we have” for used-car substitution, he said.
Meanwhile, dealerships willingly trade lower margins on vehicle sales for profits from F&I and parts and service. “This is not a story about increasing margins on new vehicles and used vehicles,” said Sid DeBoer, executive chairman of Lithia Motors Inc., in a July conference call.
“It’s about total gross profit generation out of our fixed costs, and that’s going to be the story,” he said. “People get all excited about where your margins are shrinking. Well, we’re gaining more total gross profit out of our fixed costs and that’s the goal.”