As vehicle quality and durability has increased over the years, a recent study shows these factors and more are leading to stronger used-vehicle prices.

The latest report from the Used Car Guide division of J.D. Power focuses on how improving quality is having an impact on how new cars are bought and sold as used vehicles, breaking it down into four key areas, one of which is the fact that used vehicles are assuming a more prominent role at franchised dealerships.

The white paper, titled, “Lasting Longer: How Better Quality is Affecting Used Vehicle Demand,” also shows as OEMs continue to ramp up quality, prices are rising in dealership’s used departments.

Increasing quality is causing used vehicles to depreciate at a much slower rate, according to insights from a NADA Used Car Guide Used Vehicle Price Forecast, causing many drivers to hold onto their vehicles longer.

For example, in 1996, the report stated it took about 12 years for vehicle depreciation to stabilize. But over the past two decades, the average vehicle age has grown to 15.3 years, marking a 29 percent increase.

Recent retail analysis echoes this trend, as a recent Edmunds.com report showed used retail prices hit a record high in the second quarter. Aided in part by certified pre-owned units, Edmunds’ analysis showed retail prices came in at an average of $18,800 in Q2, up 7.6 percent — or $1,300 per vehicle — from the second quarter of 2014.

Since improving quality has a played a role in ramping up demand for used vehicles, consequently, prices have gone up, as well. The Used Car Guide white paper stated it came to this conclusion using NADA Used Car Guide’s Used Vehicle Price Forecast model, which measures the relationship between used prices and key influencing factors.

Normally, vehicles depreciate at a constant rate up to a point, or what the report coined as the “depreciation boundary,” which it stated means the vehicle is beyond the age where it will post any meaningful depreciation in price.

That said, taking a look at wholesale transactions, NADA Used Car Guide reached two conclusions regarding this “depreciation boundary.”

First, the depreciation boundary is normally reached when prices to stabilize in the $1,000 to $5,000 range. The catch is with improving quality, it is taking much longer for vehicles to reach this point.

Take these statistics into account. Back in 1996, the average age of vehicles reaching the depreciation boundary was just under 12 years. But over the past two decades, average vehicle age has grown by 29 percent to 15.3 years.

“Because the time it takes to reach the boundary point depends on how fast vehicle values fall, the increase in age is a direct result of slowing used vehicle depreciation,” the report stated.

These numbers from the white paper illustrate the trend further:

• In the late 1990s, used vehicles lost an average of 15.9 percent to 16.5 percent of their value per year.
• Currently, average depreciation has slowed to an annual rate between 14.8 percent and 15.4 percent per year.

The white paper pointed out though this might seem like a small improvement, it can be significant when taken into account over the whole lifespan of a vehicle.

The report offered this example: Compared to the late 1990s, a $25,000 vehicle today would retain $466 more of its value over two years and almost $720 more after six years, due to slowing depreciation.

Another factor that can be taken into account when studying today’s stronger used prices is the narrowing gap between younger and older model prices.

Back in 2004, 4- to 6-year-old model rates were 54 percent as much as prices of models up to 3 years in age, according to the report. By 2014, that ratio had spiked by 15 percent to a total of 69 percent.

“The improvements in older model prices would not have been possible without better vehicle quality,” the report stated. “While we fully expect used-vehicle prices to drift lower over the next few years as supply finally returns to pre-recession levels, the boost in demand stemming from improved durability will keep prices higher than they would have been otherwise.”

Auto Remarketing will recap the two other areas highlighted by the white paper in upcoming editions:

• Vehicle ownership terms are increasing
• Consumers are more open to buying used vehicles