New-car rebates’ charm on used cars

Automakers are offering sizable incentives to new-car buyers, in some cases slashing more than $3,600 off sticker prices. But the effect is hardly limited to the new-car market.

Within hours of a major manufacturer’s announcement that a rebate has increased, the value of millions of used vehicles of the same model plummets on the national market.

“If a manufacturer puts a $2,000 rebate on a new car, you get a $1,700 drop on the same model in the used market,” said Jeremy Anwyl, president of Edmunds.com, an automotive information and valuation service based in Santa Monica. “The effect is almost immediate.”

Obviously, Anwyl said, a 2-year-old car gets hit harder than a 10-year-old car, which already has lost much of its value. Nonetheless, everything from the private used-car market to dealerships and corner used-car lots is affected.

An analysis by Edmunds of recent new-vehicle incentives and used-car transaction prices shows that depreciation is accelerating: In 2002, the overall market of used vehicles depreciated at a 15% annual rate, up from 11% in 2001.

Why should you care? On the one hand, rebates by manufacturers make buying a new car or truck more attractive than ever. But the same rebates have made buying a used vehicle an even better bargain than before.

A new vehicle depreciates so much in the first year that the buyer sustains a big hit.

“If buying a car were a rational purchase, you would buy a 1-year-old car,” Anwyl said. “But for a lot of people, cars are not a rational purchase. They want the latest and the greatest. The pride of owning a new car outweighs the economics.”

In addition to the emotional aspects of buying new, many consumers have avoided the used-car market because of the perception that it is harder to determine a fair price on a used vehicle than on a new one.

But the Internet has changed the picture dramatically. Every day, Edmunds and other Internet valuation services, such as those operated by Kelley Blue Book and the National Automobile Dealers Assn., post free estimates for the value of used cars.

In the past, valuation services were pretty much a local industry, subject to a given market’s quirks. Today, used vehicles are valued on a national system.

As a result, there is much less variation in prices on identical used vehicles. Prices can still swing by 20% on identical cars in the same region, meaning that some buyers are paying far too much, while others are almost stealing the cars. But it used to be much worse, perhaps 40% in pre-Internet days, Anwyl said.

The estimated prices also are more reliable than ever.

Edmunds samples 10 million transactions every year in establishing its used-car value estimates. It obtains cost estimates from the dealers’ own management systems, rejecting about 20% of the most aberrant deals.

“In the old days, a bunch of guys would sit around in a room and say, ‘How much do we put on this car?’ ” Anwyl said. That made valuations not only subjective but dependent on depreciation formulas that did not take into account what buyers were really paying in the marketplace.

Another transformation involves certification programs, in which dealers provide warranties for as much as 100,000 miles on vehicles they have inspected and repaired. That seems to provide a margin of confidence for buyers of late-model used cars, though buyers pay hefty premiums for them.

And now new-car incentives are helping push down the cost of used vehicles. The biggest incentives are being offered by the U.S. Big Three of General Motors, Ford and Chrysler, averaging a record high $3,389 in May. That compared with $1,945 for European manufacturers, $1,371 for South Korean and $1,062 for Japanese.

The incentive picture would suggest that Big Three vehicles are depreciating faster than imports. That is confirmed by transaction data from Edmunds.

Recent surveys by J.D. Power & Associates, a Westlake Village-based research firm, show that domestic vehicles are improving in quality, even as they are depreciating more rapidly. So the American consumer still assigns a stiff penalty to U.S. manufacturers, justified or not. That rewards buyers of used models made by the Big Three.

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Ralph Vartabedian can be reached in care of Your Wheels, Business, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012; ralph.vartabedian@latimes.com.