Causes of Depreciation

The initial new car depreciation is simply the difference between wholesale and retail prices, with dealer delivery charges and tax, title and registration costs tacked on.

But so many buyers paying extra for extended warranties and other dealer add-ons has caused gap insurance to become a necessity. Dealers keep this borrowed money hidden from payment shoppers.

Lame Ducks

Reputation for reliability and durability is a key determinant of resale value.

Vehicles that maintain their value best are designed and engineered well, and receive strong manufacturer support after the sale.

Such cars will exhibit limited supply and high demand in the used car market. They will move quickly from dealer lots, eBay auctions, and craigslist ads.

Nothing kills residual value faster than an aggressive incentive campaign. Slow sales of a current model drags down the used versions.

Styling fad cars, a specialty at ailing Chrysler, will tend to drop value quickly after the 8% of buyers who are primarily influenced by styling grab the next cool ride.

A minority of these will have a bounce back as classics, but most will not.

Market trends can create some astounding price drops.

For instance, the minivan was very popular for over 20 years, but the rise of the crossover SUV and the stigma known as "soccer mom" pulled out market support.

American cars in general have also become uncool.

The result: 50% of a recent Kelley Blue Book's worst 10 depreciators were minivans from Detroit.

Fuel price spikes can change car prices very quickly.

I remember the 1970's fuel crisis in southern California: gas lines were long, and rows of long Cadillac ElDorados sat unwanted at any price. Buyers lined up to pay extra for imported cars. This was how the "additional dealer markup" window sticker came in to existence.

There is a market fad coming: new high tech diesel engines for small cars. These will be quiet, more fuel efficient, and durable than gas powered cars of the same model.

Once this trend gets hot, the diesels will depreciate slower.

Niche products, such as the retro BMW Mini and Pontiac Solstice/Saturn Sky, can retain impressive residuals until more manufacturers introduce competing models.

Any vehicle sold largely to fleets, especially rental fleets, will do some real depreciating.

Sometimes this can kill an otherwise acceptable model. Ford has been criticized here for allowing product to become stale as management focused on acquisitions in Europe. The demise of the once best selling Ford Taurus, which became a favorite of rental fleets, is an example.

A few years ago leasing became very popular with manufacturers and buyers alike. Three years later, trashed out lease returns flooded the market, swamping dealers with slow moving floorplan costs.

Discontinued models can become lame ducks in a hurry.

Models undergoing a restyling can see reduced residuals.

Consider the plain but acceptable 2004-2007 Chevy Malibu. A sharp redesigned Malibu is coming this fall, undercutting sales of remaining new '07's and dropping prices on 2004-and-up used Malibus.

Optioned Out

Used-car shoppers today expect what were formerly luxury options; power windows and locks, working A/C, tilt wheel and cruise control. Underoptioned cars, even sub-compacts, may suffer.

I bought a new 1978 Chrysler LeBaron (well how did you think I learned so much about what not to do?) in north-central Wisconsin. It came with cloth seats and no air conditioning.

I moved to Santa Monica, CA and tried to sell my one year old loan-under-water Chrysler. Many buyers answered my ads, but nobody would offer anything like my loan payoff for an upscale car without leather and air.

Likewise, navigation, expensive leather seats, and premium sound in an economy car is inconsistent with a clean exit.

Unusual colors will sit longer on lots, lowering resids. Silver, white, black, dark green, and red, are acceptable to used-car buyers.

Car depreciation rates have been decreasing due to higher quality materials and better engine design. For example, replacement of carburetors with fuel injection made engines last almost twice as long.

Going forward, an increasing percentage of a car's initial purchase price is due to electronics. Sensors and computers control everything, and humans demand entertainment, navigation assistance, and Bluetooth communications integration. This introduces a level of complexity that can only be described as an engineering nightmare.

Some manufacturers will fail at this higher level of engineering challenge. Their cars will have rapid depreciation.

Builders in or flirting with bankruptcy will have fast depreciation due to desperate cost cutting and milking of the dealer network for short term cash.

Examples here are the Kia bankruptcy of 1997 and the 2006 Chrysler sales bank fiasco.

Quality problems with a particular engine or vehicle can drop prices in a hurry. A few Chrysler, Toyota, Volkswagen, Dodge, Audi, Saab, and Lexus models built from 1999 to 2002 have had oil sludging problems.