CARY, N.C. -

The bucket of used vehicles reaching the retail market these days is of the later-model, higher-quality sort, and many are set up with tech amenities that aren’t too far off from the perks found in new cars.

That’s driving many car shoppers to choose pre-owned, says Alex Klein, who is vice president of data science at Autolist.com.

The San Francisco-based company includes a meta-search platform that aggregates vehicle listings from multiple sources (think Kayak, but in the auto space). Aside from this being designed to be a helpful tool for car shoppers, Klein explains, Autolist also dives into data-gathering on both buyer preferences and market data, producing consumer- and industry-facing reports.

An example of the latter was its “Troubling Trends for New-Car Ownership” study.

Among questions related to ownership cycle, part of the September-to-May survey of more than 9,300 people asked respondents whether they planned on buying a new or used car with their next purchase (or unsure altogether). 

Thirty-eight percent plan to go used, 34 percent aim for new and 27 percent are undecided.

So, what’s driving the interest on the used-car side?

“On the whole, there’s an increase in the value proposition in the average used car. But it kind of can be seen through a variety of different angles,” Klein said in a phone interview last week.

“First of all … with more and more leased cars coming off, and back on to the market, what it’s leading to is really high-quality used cars,” he said. “Or what I like to term, colloquially, ‘lightly used.’”

Klein said “it’s a pretty compelling value proposition” for the consumer to get a good condition, 3-year-old car with 30,000 miles.

Not only that, there is a lot of them. 

In the first quarter, 53 percent of used cars sold by franchised dealers were 3 years old or younger, according to Edmunds, and this age group is only expected to grow in sales volume. 

Tech perks not far from new

Another driver to used-car demand is the significantly upgraded technology in today’s pre-owned vehicle, Klein said. Often, the buyer is going to find things like high-tech infotainment, navigation and auxiliary plug-in capability to be pretty common in a later-model used car.

“I think what is happening is that when people are looking at new cars and comparing them to lightly used cars, even, there isn’t that much of a difference in the value proposition,” Klein said. “Sure, you’re going to have slightly newer interior materials. The technology might be slightly incrementally better, but it’s not like the kind of quantum leap in interior technology that happened over the course of the first decade of the 2000s.”

Klein posits a theory that this narrowed tech gap may be part of why automakers are emphasizing things like autonomous vehicles to set new cars apart from used in terms of the value they can offer the shopper. 

They’re trying to make the next “quantum leap.”

“Anecdotally, there’s an interesting dynamic here around why automakers are pushing for vehicle autonomy, because I think that’s the next kind of quantum leap from a value proposition to drivers that they can add … You can only increase the interior technology so much, where your smartphone is essentially projected onto your dash,” Klein said.

“But the next big thing is, your car is going to be able to drive for you. Or your car is going to be entirely electric,” he said. “The incremental gains in efficiency and in technology are just getting smaller, I think. And so, it’s making used cars seem really appealing.”

Tempered by challenges

The used-car market makes for a “compelling business model” for dealers, Klein says, but the supply dynamics are not without their challenges, particularly as it relates to off-lease volume.

In its Used Vehicle Market Report from the first quarter, Edmunds points to the residual value pressure stemming from the off-lease surge and explains how that plays out with rising new-car MSRPs.

“The original MSRP of a 3-year-old vehicle sold in Q1 2017 reached $34.2K, a 14.7 percent lift from Q1 2010,” the company said in the report.

“By contrast, 3-year-old retail used values hit $22.1K, an increase of just 8.7 percent for those same vehicles on the secondhand market. In dollar terms, this translates to a $1.2K loss on the used market if used retained values had not dropped off from 2010-2012 levels.” 

Retained values on 3-year-old vehicles were at 64.5 percent in the most recent quarter, the lowest Q1 reading in the eight years displayed on the Edmunds data set (which dated back to 2010).

A chart in that Edmunds report shows that lease penetration (31.7 percent) and lease volume (1.02 million units) in the first quarter of this year, while high, were down slightly from year-ago levels. That said, the report notes: “While older used vehicles are poised for higher prices due to the supply shortage, lease returns will continue to hit the used market at elevated levels for the next two years, further reducing the values of near-new vehicles as we saw at the start of 2017.”

There will likely be a record 3.6 million off-lease vehicles this year, according to Manheim’s 2017 Used Car Market Report.

“And that’s not even close to the peak,” Cox Automotive Inventory Solutions president Janet Barnard said during a press conference at the NADA Convention & Expo earlier this year.

However, again, more used supply could mean more opportunity.

“Provided dealers can continue to stay ahead of the curve, shall we say, with understanding vehicle valuations and what prices they need to buy at to still make a profit when selling to consumers, I think that there’s an incredible opportunity for dealers to capitalize on the increased used-car demand,” Klein said.

“I think that caveat here is, though, that with the impending avalanche of off-lease cars projected to hit the market over the next couple of years, we may see — I don’t know if you’d call it a precipitous fall in values — but definitely a fall in used-car values relative to historic expectations, which will obviously have ramifications on the used-market, but as well on the current dynamics of the new-car markets, especially the leasing market, when you’re predicting depreciation of a vehicle,” he said.

“The big elephant in the room here, amongst all of this, and the big caveat with it is, while there’s an enormous opportunity for dealers to capitalize today, it’s unclear how long that’s going to last as a result of the increase in supply we’re going to see in the quality used vehicles."