WHY do vehicles depreciate so fast?

[CharlesInCharge]

This is purely a theoretical dialogue and thought exercise. If you don't want to participate or just have a snarky reply in mind please move along.

The biggest hit on depreciation seems to occur upon the first ownership transfer and first few years. I find that odd.

Assuming mechanically sound, well maintained, and relatively young (under 200k miles) I've long wondered why personal vehicles depreciate to about 1/5th or 1/10th of their original value. They are, generally speaking, the same intrinsic value. Sure, some wear and tear. But houses, for instance, tend to appreciate. And they get plenty of wear and tear. Let's take a 2003 Volvo S60. It was a very safe, reliable, comfortable car when new. But let's imagine in 2018 with 75k miles it could be had for probably 1/5th the new price; yet it's no less safe or reliable form of transport. A typical well made and maintained vehicle, at say 100k miles, still has perhaps 50 to 75% more life in it without major issues. Yet, in pre 2021 periods could be had for about 20% of the original price. It's a bizarre economic phenom. Rarely are new model years that much better than the prior year to justify such price disparity.

Now we are seeing higher car prices in new and used markets, and I wonder if auto makers are scaling back by design to reduce inventories which thereby raises prices and fixes used car prices more closely aligned to intrinsic value, rather than arbitrary values. This would, sort of, stimulate new car purchases.

Why do you suppose, or what are your views, on this. Is it economics, repairs and maintenance costs and hassles, perception of driving a used car, or loss of warranty status? Or something else?

 

[2EHA]

Let's take a 2003 Volvo S60. It was a very safe, reliable, comfortable car when new. But let's imagine in 2018 with 75k miles it could be had for probably 1/5th the new price; yet it's no less safe or reliable form of transport.

it's a 16 year old used car with no warranty

 

[vw7674]

the comparison to houses/RE is not proper. Houses last far longer than practically every vehicle on the road, plus the underlying property underneath. Then there's the truth lots of vehicles are commercial & actually provide utility that puts money in the operator's pocket.
Better to think of the initial purchaser as that bold individual who's willing to navigate the dealer's BS to drive a new vehicle with full warranty intact. That must be why they take it in the neck if they resell too early. If they keep that new purchase 15-18 years that initial loss of value scales down quite nicely. Boy. To go back in time and buy four '70 Hemi Cuda convertibles. One to drive & three for investment purposes. : l
Who am I kidding? I'd drive them all!

 

[tasch72]

People are willing to pay extra for the factory fresh version. No car will ever be as tight and bright (without significant costs) as when it rolls off the lot. It will only go down hill for ~90% of vehicles until they hit the junkyard. The other ~10% are the collector cars that are preserved through restoration.

Maintenance costs are a significant factor in projecting used car values. European cars, such as your 2003 Volvo S60 in particular, are expensive to maintain (parts cost, parts availability, unique procedures), which is why their used value crashes. Other vehicles, such as a Toyota Corolla, are easier and cheaper to maintain, so they retain their resale value better. Trucks also carry their resale value better because they're constructed with more robust parts and are more useful to a wider audience.

Supply and demand curves guide price and quantity. Right now, we're limited in supply of new vehicles and demand is increased, so the equilibrium of price and quantity is shifted for the interim. Price ceilings (maximum) and floors (minimum) and quantities min/maxes can be implemented to artificially manipulate these curves.

 

[Imp4]

Is it economics, repairs and maintenance costs and hassles, perception of driving a used car, or loss of warranty status?

Yes.

A car's value is set by the market and what the market perceives it to be worth. You will known that value based on the highest offer you receive when you sell it.

 

[PimTac]

I buy new because I will know exactly how the vehicle was treated and taken care of. 50,000 miles of tire spinning and driving recklessly doesn’t show up on any Carfax or similar reports.

 

[Wylie6G72]

#1 They were over-valued to begin with, due to the intrinsic value of "never having been touched", which disappears as soon as it's driven off the lot.
#2 Repair costs are so astronomically high when a warranty is not involved, nobody wants them around after year 3 or 5. Nobody wants them = diminished value.

 

[BMWTurboDzl]

Owners look at their all-in price which includes non-recoverable sales tax.

Then there's the warranty period. Value drops as the termination date of the warranty approaches.


Used cars are fetching higher prices because bottlenecks in computer chips have prevented cars from being built and delivered. This artificial constraint on supply with an increase in demand puts upward pressure on the price of existing inventory including used cars.

 

[Ws6]

Because literally every component in a vehicle ages. A vehicle typically does not make it past 300K miles without very serious repairs (Yes, my grandparents have a 350K mile Avalon, yes I know yours might, too, but on average, the 300K mile club is in some stoopid rare air.) So if you put 100K miles on a vehicle, and it's only 3 years old, it's still probably at what most consider it's 50% point or more. That is reflected in the value retained.

 

[Ws6]

Houses on the other hand last long enough that inflation is a factor, and their depreciation is slow enough in most examples that inflation overtakes it, and offsets it to the point that they actually "cost more money".

Here recently, vehicles are in a bubble because of the laws of supply and demand creating scarcity. It's the PERFECT time to trade an old for a new.

 

[CharlesInCharge]

Because literally every component in a vehicle ages. A vehicle typically does not make it past 300K miles without very serious repairs (Yes, my grandparents have a 350K mile Avalon, yes I know yours might, too, but on average, the 300K mile club is in some stoopid rare air.) So if you put 100K miles on a vehicle, and it's only 3 years old, it's still probably at what most consider it's 50% point or more. That is reflected in the value retained.

The same could be said of houses. A roof replacement is about 10% of the typical house value, every 10-20 years. Then you have major appliances failing about every 5-10-15 years on a typical schedule (furnace, fridge, washer, dryer, dishwasher, etc.). Plumbing leaks, settling foundations, bugs/termites/ants, landscaping issues, etc. Yet houses tend to appreciate and is the largest store of wealth for many people.

I understand the concept of cars depreciating, but it does not normally seem to be in line with intrinsic value. A 50% depreciated car, would seem to be valued at 50%. Not 5% like we commonly see.

 

[tyman]

I buy new because I will know exactly how the vehicle was treated and taken care of. 50,000 miles of tire spinning and driving recklessly doesn’t show up on any Carfax or similar reports.

Some of these posts on here regarding sludge and other things that people have rigged for maintenance....yeah. Super leery about buying used. At least most people on here have some idea about maintenance but then halve that or even more and that's the general public.

 

[Wolf359]

The same could be said of houses. A roof replacement is about 10% of the typical house value, every 10-20 years. Then you have major appliances failing about every 5-10-15 years on a typical schedule (furnace, fridge, washer, dryer, dishwasher, etc.). Plumbing leaks, settling foundations, bugs/termites/ants, landscaping issues, etc. Yet houses tend to appreciate and is the largest store of wealth for many people.

I understand the concept of cars depreciating, but it does not normally seem to be in line with intrinsic value. A 50% depreciated car, would seem to be valued at 50%. Not 5% like we commonly see.

And a house lasts longer than a car. Cars end up in the junkyard after 20-30 years. Houses you can keep fixing them up and even a gut renovation is still going to cost maybe 1/8 to 1/4 of the total value of the house depending on the area. Of course if you can get a house for 100k, then yeah, it might fully depreciate like a car where the cost of all the system updates aren't worth it. Last roof I did, value of it was about 3% of the value of the home. I think one high priced home, it was about 1/4 of a percent. Plus with homes, the rents can cover some of the ongoing expenses.

 

[kschachn]

The same could be said of houses. A roof replacement is about 10% of the typical house value, every 10-20 years. Then you have major appliances failing about every 5-10-15 years on a typical schedule (furnace, fridge, washer, dryer, dishwasher, etc.). Plumbing leaks, settling foundations, bugs/termites/ants, landscaping issues, etc. Yet houses tend to appreciate and is the largest store of wealth for many people.

I understand the concept of cars depreciating, but it does not normally seem to be in line with intrinsic value. A 50% depreciated car, would seem to be valued at 50%. Not 5% like we commonly see.

It is? Mine was about 3.5%.

And I think you're way off on the appliances and other things, all my appliances were just replaced after 21 years but that was because we wanted to do so, not because they had failed. And we don't have any "plumbing leaks" nor settling foundations. If the foundation was engineered properly for the soil then it's not going to settle any more than what the engineers specify. No termites here either but that's due to our location in Wisconsin.

There are huge differences in the life and value of real estate as opposed to a consumable commodity such as an automobile.

 

[earthbound]

It is? Mine was about 3.5%.

And I think you're way off on the appliances and other things, all my appliances were just replaced after 21 years but that was because we wanted to do so, not because they had failed. And we don't have any "plumbing leaks" nor settling foundations. If the foundation was engineered properly for the soil then it's not going to settle any more than what the engineers specify. No termites here either but that's due to our location in Wisconsin.

There are huge differences in the life and value of real estate as opposed to a consumable commodity such as an automobile.

mine was 6% 300k value 18k roof replacement for architectural shingles....

 

[fsdork]

The same could be said of houses. A roof replacement is about 10% of the typical house value, every 10-20 years. Then you have major appliances failing about every 5-10-15 years on a typical schedule (furnace, fridge, washer, dryer, dishwasher, etc.). Plumbing leaks, settling foundations, bugs/termites/ants, landscaping issues, etc. Yet houses tend to appreciate and is the largest store of wealth for many people.

I understand the concept of cars depreciating, but it does not normally seem to be in line with intrinsic value. A 50% depreciated car, would seem to be valued at 50%. Not 5% like we commonly see.

Structures generally appreciate because of replacement cost as it relates to inflation. If the cost of labour and materials stayed the same over a given period, the structure would tend to be worth less over time. If you factor out the effect of inflation, the structure would continually depreciate, meaning the growth in value of real estate is in the land.

As for the '03 Volvo being no less safe than it was when it rolled off of the line, that may be true, assuming it is properly maintained and isn't rusting away. However, safety technology keeps marching on, so relative to the 2021 models, the '03 is considerably less safe.

 

[Jetronic]

yes, but the '03 volvo would have lost significant value in '04 already and it wasn't rusty or outdated then

 

[Wolf359]

mine was 6% 300k value 18k roof replacement for architectural shingles....

Prices are higher out there. Did a 23 square roof not too long ago for 11k, strip and reroof, I think the old roof had 3 layers on it too. About 1k of that was rotted wood replacement.

 

[Snagglefoot]

Here are the three main reasons for depreciation.

1. Like said before it was overpriced and they took advantage of an over excited buyer.
2. Someone other than yourself farted in the driver’s seat.
3. It came off warranty. That’s a biggie. Why should I buy your problems?

 

[BigCahuna]

I bought my '02 Explorer in 2006 for $12,500, with 60k miles on it. It was in nice shape with a car fax that showed no issues. I still own it, and except for the usual repairs you wound do on any car, I'm not complaining. Brakes ,tires, starters , alternators, tires and brakes, a couple tail-light bulbs, and wiper blades, and valve cover gaskets, a few things I'm sure I've forgotten, plus oil changes, all of which any car would require after 19 years of service. My car has almost 250k mile on it. I just had to top off the AC a couple weeks ago, never had to touch it. So, it was paid off years ago, insurance is cheap and I'd drive it anywhere. Now, most people just have to have the latest and greatest car available, and car dealers know that, and most will pay ridicules prices for the newest piece of future regret . My cost of ownership cost me less than $1000 a year to own, and every year that number goes down. If you need every gadget and gizmo they can think of every 3 years, then expect to pay for that privilege.,,,