Glut of used cars means bargains for consumers, sales for dealers

Popularity of leasing in late '90s said to add to supply of cars on market

September 04, 2002|By Ted Shelsby | Ted Shelsby,SUN STAFF

A glut of used cars on the market is creating great buys for consumers and good times for dealers, but headaches for those in the auto leasing business, according to industry sources.

"This is a terrific time to buy a used car," said Paul Taylor, chief economist with the National Automobile Dealers Association. He said an abundance of vehicles on the market has resulted in big bargains on used-car lots.

Raymond C. Nichols, chairman and chief executive of Bel Air-based BSC America Inc., a holding company that operates auto auctions in Maryland and other parts of the country, agreed. "There has never been a better year to buy a used vehicle than now," he said.

He pointed out that the book value for a 3-year-old Ford Explorer is $15,575. That's $2,375, or about 13 percent, less than a 3-year-old Explorer cost in 2000.

The bargains are pretty much the same on Toyota Camrys.

Nichols is also president of the National Auto Auction Association, a trade group that represents 365 auto auctions in the United States and 18 other countries.

Consumers aren't the only ones benefiting from the decline in used-car prices. The trend is also proving to be good for car dealers.

"Used cars and service are an extremely important part of our operation," said Terence O. Hanley, part owner and general manager of Bel Air Pontiac Inc., which specializes in low-mileage luxury models. "They are what's carrying us right now."

Hanley said the popularity of used cars has elevated the dealer's status on the Web.

"We're selling more and more used cars over the Internet," he said. "We recently sold cars to buyers in San Diego, West Virginia and North Carolina. The secret is having the right car in inventory. People want them well-equipped, with all the bells and whistles.

"You're not going to sell a used Chevy Cavalier over the Internet, but you will sell vehicles like Cadillac, BMW, Lexus and Mercedes-Benz."

George E. Hoffer, an economics professor at Virginia Commonwealth University in Richmond and an auto analyst, said, "When we think of new-car dealers, the flashy showroom comes to mind. But the difference between a successful new-car dealership and a nonsuccessful one can be the way they run their used-car lot."

He said used cars accounted for 29 percent of the average new-car dealership's sales last year and were considerably more profitable for dealers than new cars were.

Taylor said the average dealer profit last year was $186 on a new car and $244 on a used car.

Nichols said the good times for used-car buyers will probably last 12 to 18 months more. He thinks it will take that long for a big supply of cars in the leasing fleets to make their way through the market.

The industry expects about 4 million 3- and 4-year-old vehicles to come off lease this year, double the number that came off lease last year.

"Leasing was big in the late 1990s," Nichols said. "They kept going up, up, and up and accounted for about a third of sales in 1999."

Sagging used-car prices, which cut into the residual value of cars at the end of leases, have reduced the popularity of leasing.

Under a typical lease, monthly payments are based on the estimated value of the vehicle at the end of the lease period. With the value of used cars on the decline, leasing companies are increasingly unable to sell cars and recover their investments.

As a result, Taylor said, leasing companies have raised the monthly cost to customers leasing cars by an average of $80 to $125 in recent years.

Hoffer said that companies lost on average of about $2,400 on every vehicle coming off lease last year. As a result, manufacturers have been cutting back on the number of auto leases they write. This year, leases are expected to account for about 25 percent of sales.

Hoffer said the declining value of used cars at the end of leases resulted in big losses for banks, too, in recent years.

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