Lecture on Car Depreciation and Market Dynamics

Introduction to Car Depreciation

• Cars depreciate, meaning they lose value over time.
• Unlike houses, cars start losing value immediately upon purchase.
• Depreciation is crucial for consumers, automakers, and the used car market.

Trends in the Used Car Market

• Typically, used cars lose value, but in 2020, used vehicles increased in value temporarily.
• High demand and low supply post-pandemic have kept car prices elevated.
• Trends from 2020-2022 have had lasting impacts on car availability and pricing.

Financing and Being Underwater

• Many car purchases are financed.
• "Underwater" refers to when the resale value is less than the loan on the car.
• Automakers aim to maintain car value to avoid customers being underwater.

Factors Affecting Depreciation

1. Luxury vs. Sedans vs. SUVs
   • Luxury cars and sedans generally depreciate faster than SUVs.
   • Brands with strong reputations for quality depreciate more slowly.
2. Incentives
   • Average incentive on new cars is about 10% of MSRP.
   • This 10% reduction in value is almost immediate when driving off the lot.
3. Market for Lemons
   • Information asymmetries affect resale; a car sold quickly may be perceived as a "lemon."

Used Car Valuation and Depreciation

• Depreciation continues after the first year, averaging about 10% each year.
• Wholesale market values are lower than retail.
• After three years, cars typically hold about 50% of their original value.

Exceptional Cases and Market Shifts

• Exotic and rare cars can appreciate rather than depreciate.
• The pandemic caused unprecedented appreciation in used car values.
• Supply chain issues and production shutdowns limited car availability.

Present and Future Market Expectations

• Used cars hold about 60% of their value after three years as of 2023.
• Prices are expected to remain high due to elevated costs of goods and production.
• Interest rates have increased, making financing more expensive.

Impact of High Car Prices

• New car average transaction prices have increased significantly.
• Fewer new cars resulted in a constrained supply of used cars.
• Affordability is a significant issue; median income required weeks to purchase a new car.

Potential Solutions in the Market

• Opportunity for OEMs to build more basic, affordable cars.
• A market exists for cheaper, less content-rich new vehicles.

Conclusion

• Ongoing high prices mean the car market dynamics have shifted.
• There is a demand for more affordable car options in the market.