The willingness to buy one good or service instead of another when the price of the former falls relative to the latter is known as "the substitution effect." Some classic examples include when a consumer chooses a generic over a brand-name product, shops for chicken instead of beef, and hops on the subway instead of into a taxi. In the current economic environment, however, this particular calculus is having an especially dramatic and unpredictable impact on a broad range of markets. In "Used-Car Sales Accelerate," the St. Louis Post-Dispatch writes about one of them.
Vehicles are still moving off the lot, but not in a way Paul Kastner has seen in more than 35 years with Weber Chevrolet.
For every two new cars sold at the Creve Coeur dealership, three used ones are moved, too. It's a stark difference from just a year ago, when about four new vehicles sold for every used one.
"It stunned me, frankly," said Kastner, the general manager.
U.S. used vehicle sales among franchised auto dealers are on pace to reach about 14 million vehicles this year, according to CNW Research in Bandon, Ore. That's slightly lower than before the recession, but more than 2008's level. And this year, unlike recent years, current projections suggest that franchise dealerships should expect higher sales of used vehicles than of new ones.
Consumer confidence is the linchpin to motivating new-vehicle buyers, analysts say. People won't buy if they worry about losing their jobs.
But that doesn't mean they won't buy a used vehicle. In many cases, they simply have to, said Tom Kontos, chief economist for ADESA Auctions, an auto auction company in Carmel, Ind.
"Cars are assets that wear out, and at some point, we recognize that to repair the vehicle will be more costly" than buying one, Kontos said.
Used vehicles are sold not only by franchised dealers, but also by independent used-car lots or by individuals. Franchised dealers — which have both new and used cars and trucks — will sell about 36 percent of used vehicles this year, according to CNW Research.
But these dealers, automakers' lifelines to area communities, are noticing a trend that won't help the auto companies move new vehicles. Area dealers say they notice a shift toward used vehicles with specific price points.
In north St. Louis County, where the home foreclosure rate is among the region's highest, Dave Mungenast North County Hyundai is trying to maintain an inventory of lower-priced used vehicles. The dealership has focused on selling 2005 and 2006 models, instead of 2007 and 2008 ones, said Tom Barr, general sales manager. Now the average price of a used vehicle there is $11,500, he added.
Other dealerships' officials mentioned similar strategies — $12,000 and lower.
That's squarely where Torre Viviano's price point falls. Last week, she said she was looking to spend between $10,000 and $12,000 on a compact or mid-sized car, and trade in her 2000 Oldsmobile Alero.
Viviano travels frequently for her job as a grocery store merchandiser. As she puts it, her old car is "just falling apart, and I don't want to be stranded." She has looked at new models but is more likely to settle on a used car.
"It all depends, whatever I can find," said Viviano, 21, of Arnold. "Something decent in my price range."
But several factors might lure buyers such as Viviano back into the new-vehicle market. Take new-car incentives, such as financing or rebates. Automakers are offering many incentives for new vehicles, which produces competition with similar models just a few years old, analysts say.
Basic economics figure in, too. A tighter supply of used vehicles is raising the prices on these cars and trucks. "Each month, on average, has been a price increase in used vehicles," said Paul Taylor, chief economist of the National Automobile Dealers Association in McLean, Va.
Many dealers stock their used inventory with vehicles from new-car buyers. But as people hold off on shopping — or at least hold onto their used cars and trucks a little longer — dealers see fewer trade-ins, analysts say. Twenty-eight percent of new-car purchases have a trade-in, compared with 50 to 60 percent of deals in the recent past, said Art Spinella, president of CNW Research.
"You're looking at millions of vehicles not in the used-car side that would have been," he said.
Fewer trade-ins mean used-vehicle prices are rising — a positive for potential buyers because their current cars are probably worth more now than a few months ago.
Analysts say automakers may see some good news, too. Higher trade-in values should push some buyers back into the new-vehicle market, changing the ratio of new to used yet again.