We are a nation of consumers who always want the latest gadgets and the newest versions. We buy inexpensive clothes at chains like H&M and toss them the next season. We get rid of perfectly serviceable outdoor grills and stoves to buy the latest and greatest with more bells and whistles. We willingly try new toothpastes, razors and motorized stain-treatment systems when they hit the shelves.
So it should come as no surprise that we do the same with our cars. The dramatic rise in leasing in the past decade, along with the alluring financing plans available these days, has made getting in a new car every two or four years easier -- and more tempting -- than ever.
But as ads for new cars saturate the airwaves and fill the newspaper, I got to wondering what was happening to all the old cars that people are trading in so they can drive off in those groovy new wheels. Is there a huge backlog of dusty cars piling up somewhere that are just two years old, or worse, eight years old?
In fact, there has been a flood of older cars pouring into dealerships over the past several years. The main side effect of this dynamic has been to push prices down in the used-car business. But so far the used-car market, always efficient, has become even more so. And some demographic trends have helped stave off a full-bore glut of older vehicles.
Still, the long-term effects of the industry's sales trends are unnerving, and unlikely to change anytime soon.
"It has a waterfall effect all the way through the used-vehicle market, from the high end all the way down to the low end," said Tom Webb, an economist with Manheim Auctions of Atlanta, the nation's largest wholesale auction company. The way Webb describes it, manufacturers are "forcing" the market by "pushing more product out there than there is underlying demand for."
The fastest-growing segment of available cars encompasses those that are 10 years and older, because automobiles today are engineered to last much longer than they used to. Getting 100,000 miles out of an engine used to be a real feat; today it's no big deal.
But all those used cars are starting to puddle at the bottom of the age scale. In 1993, the median age of all passenger cars on the road was 7.3 years. Now it's 8.6 years. And demand for these oldies but goodies is getting pretty slack.
"To a certain extent, the engineering life of a vehicle in many cases surpasses its economic life," Webb said. "A lot of these vehicles [become] the third or fourth vehicle in a household. They may not get driven much, may not have much market value, but they're still mechanically sound."
Indeed, the number of cars owned by U.S. households has been creeping up, which has helped limit the number of vehicles stacking up on used-car lots. So is the fact that we drive our cars more per year now -- about 12,200 miles a year, up from 9,500 in 1960 -- which is keeping the average lifespan of cars from climbing even faster than it already is.
And many cars aren't even reaching a ripe old age these days because newer models are designed to crumple in a serious accident, thereby absorbing the energy of the crash and protecting the car's occupants. That means more vehicles are being "totaled" in accidents and junked, said Dennis Galbraith, senior director of the automotive practice at J.D. Power & Associates.
But these effects are relatively slight compared with the steady growth in the number of new cars we're buying and trading in every year. So far this year, 9.9 million new cars and light trucks have been sold in this country, according to Ward's Automotive Business, compared with 9.7 million in the first seven months of 2003. And the more we buy new cars and trade in our almost-new ones, the more cars we send downstream.
"Used-car prices have been pretty weak -- this is the third year -- just because of oversupply," said John Thomas, an industry analyst for the National Automobile Dealers Association. "You have dealers that are carrying larger inventories for used vehicles because there's not that much demand."
Does anyone care? Used-car dealers don't exactly inspire a lot of sympathy, and for the time being, they're benefiting from low interest rates. But some industry observers say this whole fragile balance could be severely disrupted if interest rates go up, which would make it more expensive for used-car dealers to keep those larger inventories.
And if the used-car dealers start hurting, that just may make it harder to prop up new-car sales with so many incentives and short-term lease deals. Not only would a severe drop in used-car prices put more downward pressure on new-car prices, it might also disrupt the fragile balance that has developed between new cars sold and old cars bought.
Right now, manufacturers and dealers can keep pushing us into new vehicles because both dealer and consumer know that there will be a market for that vehicle four years down the road. "Buyers now are more cognizant of what the residual value of their vehicle will be when they want to get rid of it," Webb said.
But those residual values are impacted by the vibrancy of the used-car market. Manufacturers have done a lot to help strengthen the market for later-model used cars by creating a new class of "certified" pre-owned automobiles that carry good warranty protections. But there's only so much big automakers can do to influence the value of all the cars that are piling up after two, three or four owners -- especially if the economic recovery doesn't bring the increased demand the industry is hoping for.
Eventually, whether it's next year or five years from now, that weakness could dam up the flow of vehicles throughout the marketing stream. And if that happens, we may have to adjust our expectations about new cars, how easy they are to buy and how often we really need one.
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