Putting Off the Decision to Buy a New Car May Be the Smartest Decision You Make

Then again, used cars will soon begin losing value at an accelerating rate, too — what’s a person to do?

The US auto industry had a record year in 2015. After surviving the sales trough tied to the financial and housing market implosion of 2008, US auto sales have been steeply up and to the right since the middle of 2009. In fact, the skyrocketing growth in car sales over the last six years is the strongest recorded by the car industry since World War II.

Looks rosy, doesn’t it? Then again, so did the housing market in the years before 2008. That’s the nature of economic bubbles.

Looking under the covers, we see some dirty sheets. Analysts have discovered negative equity ratings in almost a full third of car owners. They’re “under water,” in the parlance of the auto industry. The number of car owners who owe more on their car than it’s worth has rapidly almost doubled. Meanwhile, during this last six years of “growth,” average loan lengths have increased by two months per year, allowing more people to finance cars that they might not have been able to afford under older, more conservative, financing guidelines.

And an almost record number of those loans are “subprime,” meaning at higher risk of default. So now the auto industry growth is beginning to look like something we might see in a sequel to the 2015 Oscar-nominated movie, “The Big Short.”

Adding risk is the fact that millennials are showing increased apathy toward the historical “thrill” of car ownership. Falling percentages of them are even bothering to get a driver’s license. On-demand ride sharing has already eroded many city dwellers’ interest in car ownership. That trend began causing used-car prices to fall in 2015 and is forecast to continue through 2016.

Now we introduce a new specter, the age of autonomous cars. Their revolutionary technology and ability to transform the transportation experience looms to begin pulling more blocks from the bottom of this financial Jenga tower. What does that mean to you?

Assuming you don’t live in one of the few cities in the US where it’s common for people not to own a car, you or your family probably owns at least one, and maybe multiple automobiles. Within a few years, the value of those cars — your ability to sell them when you no longer want them — will begin to fall through the floor.

Probably beginning around 2020, but perhaps as early as 2019 for some cities, great masses of people are going to collectively decide that not only would it be stupid to buy a new car, they no longer want the expense of owning their old one. They’re going to anticipate the leap to new autonomous, on-demand transportation services. For many, that buy-in will be lock, stock, and barrel.

Within a couple years, markets will be flooded with used cars, for which there are decreasing numbers of buyers. The rest is basic economics, supply and demand. Five years from now (2016'ish), if you’re still hanging lovingly onto your old family horse, you’ll be lucky not to have to pay someone to cart it away for scrap.

In some parts of some countries, in the next few years, if you buy a new car without the capability for fully autonomous operation, you’re setting yourself up for major losses. Unless that car appeals to some specialty market (perhaps well-to-do folks with a passion for driving a sports car, for example), you should expect that new car to depreciate at devastating speeds. If you finance much of your car’s purchase price, you may never get to the point where the car is worth more than your loan payoff.

This will be exacerbated by additional financial realities. Those in the lower income brackets, young people entering the labor force, and the semi-skilled laborers who create most of the market for used cars are: (1) certain to be hardest hit by the coming changes, because historically that is the population most impacted by times of technological and economic disruption; and (2) the demographic who will probably find the cost savings of on-demand transportation most compelling.

As the demographic who comprise most of the gently-used-car market’s buyers become early adopters of autonomous on-demand transportation, the demand for used cars will evaporate. There will suddenly be an overwhelmingly greater supply of used cars than demand. Prices will plummet.

Your non-autonomous trade-in’s value will plummet with it. Even in areas where on-demand transportation does not quickly reach critical mass, forcing you to own your own car, the financial and quality-of-life incentives for owning a new self-driving car will still dampen the demand for the obsolete car you’re driving today and will soon be anxious to sell.

The used-car market implosion will begin in the cities, where autonomous on-demand car services will first appear and gain adoption. As demand ramps and the number of self-driving cars increases to meet that demand, people in those areas will begin divesting themselves of (dumping!) their cars. That will cause local used car values (for non-autonomous cars) to plummet. At the same time (if not before), new car sales in those areas will slow as people realize they’re decreasingly interested in taking on that unnecessary expense.
For a time, there may be some business opportunity in moving cars from regions where the supply of used cars is ballooning (causing falling prices) to areas of the country (or neighboring countries) where on-demand transportation has yet to become available. But that will last no more than year or two.

That domino effect of a glut in the used car market and softening new car demand will ripple outward from cities, into the suburbs, and finally into the country. With the ripple, car dealerships will contract in volume. The number of people they employ will decrease. Then used-car dealerships will begin to fold up their tents.

As on-demand transportation becomes ubiquitous, the only people buying “old fashioned” human-driven cars will be those who’ve figured out a way to make money from disassembly or scrap, or by moving them to regions of the world where autonomous cars are unsupported or disallowed.

Or people who’ve taken up driving in demolition derbies…

Smart people need to begin watching the market and the developing autonomous technologies. Timing, or mistiming, when you ditch your non-autonomous car could save you, or lose you, thousands of dollars.

This article is an excerpt from the first edition of the book, “Self-Driving Steamrollers (Your Guide to a Future Featuring Autonomous Cars You May Never Buy)”. It’s available for Kindle on Amazon.com. “Self-Driving Steamrollers” is an example of “Book 2.0,” encouraging collaboration. If you have something to say on the subject, you can submit your suggested essay or additional chapter(s) for inclusion in the next edition of the book. Editions come out often!

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