Used-Car Shoppers in Driver's Seat

By STUART SILVERSTEIN and MARLA DICKERSON

Aug. 25, 2001 12 AM PT

TIMES STAFF WRITERS

Used-car dealer David Cooper figured on an easy sale after rolling a fire-engine-red, low-mileage 1997 Ford Mustang convertible onto his lot in Canoga Park. Yet even after slashing the price three times, from $13,900 to $10,900, there were no takers.

So last week he finally gave up and shipped the car off to auction, the equivalent of sending an old nag to the glue factory. “The thing would not move,” he lamented.

As Cooper now knows only too well, the value of used cars and light trucks has stumbled lately. A slowing economy and the incentives that auto makers are lavishing on new-car buyers have depressed prices in the used-vehicle market.

Industry analysts say the downward pressure on prices is especially intense among used cars and trucks that are 3 years old or newer, thanks to millions of late-model vehicles coming off lease contracts.

For those shopping for used cars and trucks, the trend has yielded bargains. But for other sectors of the economy, it is costly. Major auto lenders, as well as some sellers--including consumers who are counting on good trade-in prices--are being hurt by the declining used-car values.

Bank of America this month emerged as one of the latest casualties, announcing that it would exit the auto-leasing business after taking write-downs of $683 million. Like a number of financial institutions, it crafted vehicle leasing deals in the late 1990s based on estimated resale values that proved far too optimistic.

The fast-changing auto market makes it difficult to precisely track patterns in used-car prices, but various measures show them sinking. According to the U.S. Bureau of Labor Statistics, consumer prices on used cars and trucks this year have fallen at an annual pace of 0.9%. This could be the first year that used-car prices have declined since 1997, when they dropped 4.9%. Although prices of many smaller-ticket items also have dipped, consumer goods overall this year are up at a 2.8% rate.

Depreciation in used-car and truck values is particularly striking among vehicles whose new models are top sellers. Take, for instance, the hot-selling Toyota Camry. According to the National Automobile Dealers Assn.’s Official Used Car Guide, a 1999 Camry that sold for $13,850 in June 2000 went for $12,050 in June of this year, a drop of 13%.

Values also have fallen 13% in the overall used-car market this year, compared with a standard depreciation rate of 11%, according to Edmunds.com., a Santa Monica-based firm that monitors car pricing.

For some vehicles, the descent is even steeper. A ’99 Ford Explorer V-6 sport-utility vehicle, still a leading seller despite the Firestone tire controversy, was selling for $15,625 as of this June. That was off more than 21% from a year earlier.

Experts say used-car prices tend to be cyclical, and the market could remain soft over the next year as huge numbers of vehicles continue to come off leases and manufacturers persist in offering rebates and other incentives for new models.

The bottom line for buyers able to come up with the cash or financing is that good deals abound.

“You’re talking about getting more for your dollar,” said Bob Kurilko, a vice president with Edmunds.com.

A Flood of Good, Well-Equipped Cars

Kurilko said the flood of leased cars being turned in to dealers is creating a glut of well-equipped 2- and 3-year-old autos, SUVs and pickups in good condition.

That surplus represents opportunity for shoppers such as Bill P. Jones, a 47-year-old dental supply sales representative in Los Angeles. Jones has looked for deals on late-model sport-utilities over the last six weeks. He says he is close to buying either a Jeep Cherokee or a Ford Expedition.

“There are so many used cars out there now that are in good shape,” Jones said. He hopes that the backlog of used SUVs will help him bargain for a low price and good financing terms. “I’m looking for reliable transportation and low payments,” he said.

Good selection and deep discounts are not available on every type of vehicle. Meril S. Platzer, a neurologist from Agoura Hills, spent much of last week hunting for a used Mazda Protege for her 16-year-old daughter. She finally snagged a white 1996 model with 97,000 miles for $5,995, but only after she was beaten to the punch by other buyers on three other used Proteges she saw advertised.

“The economy may be soft, but people still are looking for fuel-saving cars,” Platzer said. Although she said she couldn’t get the dealer to budge on the asking price, she did get an extended warranty thrown in for only $80 more.

Though prices generally are down, the number of used cars being sold is expected to reach record levels this year. ADESA Corp., an Indianapolis-based operator of auto auctions, projects that consumers will buy nearly 42.7 million used cars this year, up 2.5% from last year.

But intensified competition among sellers of those cars is another factor keeping a lid on prices. These days, many new-car dealers are expanding their used-car operations in pursuit of heftier profits than the cutthroat new-car market provides.

For AutoNation, the country’s No. 1 car retailer, steady used-car sales lately have partly offset declines in its new-car sales, its principal business.

The Fort Lauderdale, Fla.-based chain is concentrating on older vehicles in the $10,000 to $12,000 range while avoiding late-model vehicles whose values have been hammered by oversupply and new-car incentives, according to Michael Maroone, president and chief operating officer.

“We’ll still carry a few late models, but we’re going to be very careful what we pay for them,” Maroone said. “It’s like fruit or vegetables sitting on a truck. Every day it sits, it’s worth less money.”

Lease Finance Firms Take the Worst Hit

The worst pounding has been taken by lenders financing auto leases, a business that is closely tied to the used-vehicle market. Write-downs related to auto leasing at just four big banks--Bank of America, Bank One Corp., J.P. Morgan Chase & Co. and Wells Fargo--have topped $1.5 billion since the economic slowdown began late last year.

These and other financial institutions helped fuel the 1990s sport-utility boom by providing bargain leases to consumers. The key to the profitability of these deals is a vehicle’s so-called “residual value.” That’s the price a lender figures it can sell the vehicle for in the used-car market after the original lease expires and the car is returned.

The trouble is, the sheer volume of lease deals made in the late 1990s, combined with ramped-up production and heavy discounting by car makers, produced a glut of vehicles. That, in turn, led to slumping resale prices.

For example, in 1998 a bank leasing a new Ford Expedition to a consumer could have expected to recoup $18,800 for that vehicle in the wholesale market at the end of a three-year lease. That is according to projections made by Santa Barbara-based Automotive Lease Guide, whose residual figures are considered a reliable industry benchmark.

But 36 months later, the reality is that banks can reasonably expect to receive only about $15,000 at wholesale for the Expedition--20% below ALG’s projection.

Even for some consumers, the declining values can be traumatic. Shoppers who want to trade in a vehicle sometimes find that they have no equity in their current car or truck. In other words, the amount of money they still owe is more than the vehicle is worth in the current market because of rapid depreciation.

As a result, some would-be customers “aren’t able to come back into the buying market as early as before,” said Cooper, sales manager for Deals on Wheels in Canoga Park. “They can’t get out of their existing cars.”

Still, for shoppers such as Jones who aren’t worried about trade-in values, these are opportune times to be in the market for a used vehicle. He plans to spend no more than $17,000 on his dream SUV, and he is counting on finding one with leather seats, a CD player, power seats and other options.

“I want one with bells and whistles,” he said.

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Sinking Values

The depreciation of late-model used cars this year has been particularly steep among the 1999 models listed below.

Ford Explorer

Ford Taurus

Ford Ranger

pickup

Chrysler

Grand Caravan

Ford F150 pickup

Jeep Grand