WHY do vehicles depreciate so fast?

[Ws6]

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.

Ease see my next post. Below the one you quoted.

 

[pghvolvo]

Volvo's use to be awesome cars to own if you wanted a car that didn't depreciate that much. Well that all started to change with the introduction of FWD starting in 1993. The S60 if you don't know is in the top three highest depreciating vehicles. Three year old $38K-$42K Volvo S60 with 30K on the clock can be had for under $20K

The reason cars are dropping in value is due to repair costs. I was in my Volvo dealer about three months ago and there was a few year old XC90 SUV in for routine maintenance and state inspection. It had something like 50K miles on it.

I was standing there listening to the service writer on the phone with the owner explaining that he or she was looking at just over $2,000 in repairs and maintenance.

I'm on Volvo boards and the problems start around five to seven years and those bills are adding up to serious money for repairs.

I own a 97 960 with 129K miles on it and it cost me less to maintain that car than a new Volvo with 60-75K miles.

This isn't just Volvo but most manufactures got cheap and the consumers are the ones paying the price. Today the only cars I would consider would be from Honda and Toyota. Trucks OTOH, I'd toss in Ford to that mix. The repair costs and repairs when most cars get over 6-7 years can put a real dent in your wallet if you own the wrong car. I've heard the joke more times than I can remember from mechanics, you know what that star on the Mercedes really represents, a bullseye on the owners wallet?

The other problem is due to maintenance costs many people are dragging out the services or not doing them at all. I've heard more and more stories of people skipping oil changes on leased cars. The car or truck gets turned in at the end of the lease and the person who leased is looking at either having to buy it or replace the motor due to sludge. A Tech at a local BMW dealer said it might have be a one or two vehicles a year situation now it's a monthly problem. The first thing they do is pull the maintenance records and see if it's dealer serviced and oil changes were done on time. If not they take off the oil cap to see if there is any sludge. Any question the valve cover is also pulled.

This is why dealers are writing the date and the mileage on the oil filters because people are lying about how often the oil is getting changed.

I understand a couple local dealers have been putting in the lease agreements that if you don't follow the manufactures service recommendations you could be required to purchase the vehicle at the end of the lease.

 

[Duffyjr]

The biggest hit on depreciation seems to occur upon the first ownership transfer and first few years the minute you drive it off the lot, the rest of the time it gradually depreciates, just sayin'.

Fixed it for you. In the first month it will depreciate 10%.

 

[gathermewool]

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.

That depreciation buys a lot of maintenance, though…

 

[Oillover]

I understand a couple local dealers have been putting in the lease agreements that if you don't follow the manufactures service recommendations you could be required to purchase the vehicle at the end of the lease.

I'd be very interested to hear of any (recent) leases with that condition.
How exactly could the dealer determine what constitutes "manufacturers service recommendations"?
For instance, would OCI's done at home by the customer qualify? if so, what engine oils are/ are not permissable?

 

[JeffKeryk]

Houses vs cars is apples vs oranges. My little stick Silicon Valley cracker box is worth 5 times a 4,000 square foot brick house in Arlington, TX.
Location location location.
But their worth is determined the same way; an item is worth what the market will bear.

Depreciation is determined by numerous factors:
Expected reliability based on history or word of mouth, aka Toyota tax
Is the car desirable? Lexus vs Hyundai
Demand vs supply curve

 

[dishdude]

It doesn't seem like cars depreciate any more. I'd love to buy a cheap used car, but they don't exist. It makes more sense to buy new and replace every couple of years...I have no interest in keeping a car for hundreds of thousands of miles when I can swap every few years and pay less per mile for the best years of a vehicle's life.

 

[CharlesInCharge]

Great discussion, thanks for all the input.

Someone mentioned inheriting problems, and that can be true but can also be avoided with a well maintained lightly broken in car. Essentially, provided it's not beat on and the oil has been changed per recommendations, a car with 60,000 is probably 90% "new" yet the value is perhaps down 50% or even 70%. This does not make much economic sense in my view. For my entire life, and I've mostly followed it, I've been told to buy well maintained low miles used cars because of this weird depreciation "gap." You're capturing a lot of "value" at a relatively low cost.

Also, and I think we see it with some brands or models, that they often hold value very well due to their record for simplicity and durability. Such as the early Ford F150s trucks, some Chevy Trucks, some Dodge trucks, Ford Broncos or some Toyotas that people really seem to like and pay a premium for even on the used market. Call it "tried and true" designs. I tend to favor the knowledge of a brand/model design that is durable and proven after say 5 or even 10 years of consumer use, and I place a premium on that. And the opposite is true with cars that are very maintenance intense, we see their values drop off a cliff in the used market due to the known issues and repair costs.

 

[Accent Abuser]

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.

Hyundai's are cheap and easy to maintain too but their resale value doesn't hold like a Toyota. I assume that will change as people realize Hyundai is not what it used to be.

 

[Ws6]

Hyundai's are cheap and easy to maintain too but their resale value doesn't hold like a Toyota. I assume that will change as people realize Hyundai is not what it used to be.

I do not know the raw materials value in a Hyundai, but I've owned Chrysler and Mazda and Nissan, and I can tell you that the raw materials used in Mazda are way better than Chrysler or Nissan, and this is reflected in the resale value. Toyota is even better. It's not "Oh, the engines last long time...", it's more "Hey, these bushings are still good! These water pumps aren't leaking! This window motor didn't go out!" little stuff like that, that makes the Toyota take far longer to turn into a "basket case" than many others where as soon as one thing is fixed, the other breaks, and it's just a "Never fully functional" vehicle. I know everyone has experiences with one thing or another, I mean "in general, across the board".

 

[dishdude]

I can tell you that the raw materials used in Mazda are way better than Chrysler or Nissan, and this is reflected in the resale value.

 

[Ws6]

Maybe they're better in 2021, but I harbor doubt. I briefly considered a Stelvio, and while I was on their forums, all I saw was a horror show.

 

[UNC200]

in some housing markets, the value of the home is a direct function of its fair rental value. just a very small piece of info for a very complicated discussion.

 

[UNC200]

also while i agree that houses get wear and tear, home repairs are generally far less costly compared to the cost of the home and generally last longer. a roof lasts a lot longer than a set of tires or break pads, for instance.

 

[UNC200]

and a home has a lot more influence on your life - where your kids go to school, how long you spend commuting each day, whether you can have a dog, etc.

 

[fisher83]

The value of my wife's Subaru has stayed pretty consistent over the last 2 years. Private party value is roughly the same as what we paid for it brand new in 2019. In that same amount of time the value of our home has gone up by about 30%. Homes can be a very good investment but vehicles almost never are.

 

[UNC200]

also while i agree that houses get wear and tear, home repairs are generally far less costly compared to the cost of the home and generally last longer. a roof lasts a lot longer than a set of tires or break pads, for instance.

my god i need to stop posting while watching my kids. BRAKE pads!

 

[dareo]

I saw a Chevrolet SS automatic sedan, 2017 and like 35k miles. It “depreciated” upwards to $50k. Some were able to buy them new in the 30s before they got discontinued. I nearly bought one with like no miles but i baulked at the $36k price just 14 months ago.

Supply and demand pushed this one up.

Normal, volume cars, its more about what people can afford. They can afford new so they buy it and dump their used. The lower perceived value becomes a self fulfilling prophecy. I coulda bought any old used mini van for cheap but chose to go brand new, enforcing the lower value of used and higher value of new by one more unit.

If car loans stopped being a thing, or became very expensive, we would value those 60k+ mile used cars a lot more.

 

[BMWTurboDzl]

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.

Location accounts for a substantial amount of the subjective value of a home and supply is relatively inelastic. Obviously that's not the case with automobiles..

 

[BMWTurboDzl]

I'd be very interested to hear of any (recent) leases with that condition.
How exactly could the dealer determine what constitutes "manufacturers service recommendations"?
For instance, would OCI's done at home by the customer qualify? if so, what engine oils are/ are not permissable?

It can be done but remember maintenance is typically part of the lease (either included or pre-paid). The thing is that dealership and automakers themselves are loathe to hold a customer accountable because they want that individual to lease a new vehicle. I suspect it's more of a scare tactic than anything else. For example automakers have for years known when a vehicle had been tuned but they never hold the customer who leased the vehicle responsible for additional wear-and-tear caused by the tune itself. They would deny and then re-apply warranty for the affected parts but never a WnT charge at lease turn in.