The value of cars in the future.

[Praxis]

Cars have always depreciated, but at a fairly slow rate.

The truth is, though, that cars really aren't that different for the average user.  A two year old car isn't necessarily better than a five year old car in terms of safety, miles per gallon, speed, or reliability (other than warranty). You can find a five year old car that is just as good as a brand new car besides wear.  Or even a ten year old car. 

A 2014 Mustang does not make a 2013 Mustang look obsolete.  The featureset is the same, barring some gizmos (satellite radio!  CD changers!  MP3! Climate control!).

It's not like the world of computers, where a five year old computer is dramatically inferior to even a low end new one.


However, the future of cars is looking to integrate more and more technology.  Look at the Tesla model S right now.  It has a 250 mile range.  Next year we're going to see the Tesla Model ||| (3), with a 200 mile range at $35k.

But two or three years after that, you'll have cars at the same price with 300 mile range.  Within a few years of that, they'll have 350 mile range and autopilot.  We're going to see more features and bigger upgrades with every revision, that makes the old model look very obsolete.

The Tesla of 2020 will likely have dramatically more range and features than what comes out next year and make a 2015 Tesla look ancient.


I feel like this is going to happen all over the place.  The current Nissan Leaf with an 80 mile range is going to look like a joke in 2-3 years.  We're going to see much faster iteration and change cycles, and people are going to feel their car is outdated much faster.  I can imagine this may result in people wanting to upgrade their car more often.


Mustachians: Do you agree?  If so, what kind of effect do you think this will have on the used car market?  Will we see used cars dropping much faster in price, like in the computer industry where nobody wants a 3-year-old PC?

[FireDAD]

Currently the demand is the opposite of what you state. Used cars are currently demanding a premium due to lack of inventory.

I don't see it changing too much. There will always be those that need the newest and greatest (leasers) and those who want a bit of a deal who will buy used.

[TurtleMarkets]

Dont forget about retrofitting used electric cars. If your 5 year old Tesla only difference is batteries or some software it may make used ones retain their value.

[CCCA]

I think you are right about the batteries in electric cars.  They are a rapidly evolving technology and the changes are less so about what service they can provide and more about size, weight and importantly cost.  If you can get a car that does 150-200 miles for the price of a car that currently does 80 miles on a charge, then I think people will be tempted to upgrade.

That said, electric cars will still be a small portion of the total market so the people it affects most are early adopters, who are always at the leading edge of technology and always have incentives to upgrade.  It's like the first iPhone buyers in 2007-2010.  Now, there's just less they can add to the phone to make it more desirable than a last years model because most of the important stuff is already there and you have lower marginal benefit for each additional feature.

[Prairie Stash]

I will still be buying used for decades to come, if no one else wants used cars I'll be saving a fortune driving free cars for 200 miles. Unfortunately I think other people will feel the same way. There's always going to be people who evaluate vehicles on cost alone, until I can get cheaper $/mile from electric I'll drive with gas.  Then when I can get a cheap electric I'll still determine cost/mile and buy accordingly. Then we'll start hearing about electricity prices being so high instead of gas prices, people will still complain about something.   

I think enough others feel the same way to keep the used car market going for decades.

[Praxis]

I think you are right about the batteries in electric cars.  They are a rapidly evolving technology and the changes are less so about what service they can provide and more about size, weight and importantly cost.  If you can get a car that does 150-200 miles for the price of a car that currently does 80 miles on a charge, then I think people will be tempted to upgrade.

That said, electric cars will still be a small portion of the total market so the people it affects most are early adopters, who are always at the leading edge of technology and always have incentives to upgrade.  It's like the first iPhone buyers in 2007-2010.  Now, there's just less they can add to the phone to make it more desirable than a last years model because most of the important stuff is already there and you have lower marginal benefit for each additional feature.

I'm not really sure this is true yet of phones.  I mean, each iPhone release has on average almost doubled CPU power.  (Averages to about 80% increase a year...some years are doubled.)



There's been pretty solid reasons to upgrade.  I'm on an AT&T plan that my work subsidizes, so I might as well upgrade since I can get AT&T to unlock my old phone and sell it for more than my upgrade fee.  Every two year leap has made the previous phone felt useless (as opposed to my PCs which I build high-to-mid end and keep for five years).

I (personally) think used electric cars will get really cheap really fast as people view their 200 mile car as "useless" when a 400 mile car with autopilot comes out.  If this is the case, buying new looks worse than ever.

[slugline]

There's something called "the network effect" that drives down the value of old computers and smartphones. They go obsolete when they are unable to run the latest mainstream applications, connect to mainstream infrastructure, and interact effectively with users on other devices.

When does this happen to a car? Will there come a point where a "dumb car" is too old to drive on "smart roads"? Until that happens, I think the old cars depreciate just like they always have.

[gimp]

The Tesla 3 is not being released next year, unfortunately. The Tesla X is. The 3 is still a bit away - 2017 or later.

With that said, slugline has hit the nail on the head. Electronics depreciate rapidly due to incompatibilities, either in hardware, or protocol, or simply horsepower - older computers can't run the workloads expected both by users and content creators.

Consider these examples:

- An old computer that was built well in 2009 is still good today in terms of performance, but not power. If I compare my laptop versus new ones in the same price range, battery life has improved 5x (900%) while performance has improved maybe 25-50% depending on the workload. (Or 400% if you're running something very specific.) As such, it has no real cash value anymore but it's still a valuable tool and prevents me from buying a new laptop.

If there were a strong market for old but useful computers, it would be worth several hundred bucks - the only real reason its cash value is approximately zero is because no such market exists, because most people don't buy computer hardware intended to last 5+ years.

- An old digital camera depreciates in waves, coinciding with the releases of new digital cameras to replace it, and price markdowns from OEM and retailers. For example, a $3500 camera might be sold used at $3000 for eight months before it suddenly drops five hundred bucks due to a permanent price cut, then again a year later, then drop half its price when the new version is announced and sold. However, at a certain point, the price of digital cameras stabilize and they do not drop any further. This is because there is a strong market for old cameras, and this is because cameras solve a human perception problem - reproducing an image - and once this is solved it doesn't suddenly become unsolved when it gets technologically obsolete. The cameras themselves may break, or the sensors may die, or the processors; and their file formats may become unsupported by some software, and the price of their data cards might rise as they become near obsolete, but that's about it.

- On the other hand, camera lenses drop a small amount of value upon being sold, then never drop in value again unless they are discounted permanently, or they are made obsolete by a better lens made for the same use but with better performance, or unless it gets damaged. This is despite modern lenses having oddles of electronics - basically, until it stops working the value people will pay doesn't drop.

In the same ways, modern features on cars don't decrease the value of current cars... much. An expectation of better MPG might, better performance might, better handling might, but all of these will be rather minor decreases. As long as a car runs and is in decent condition, its price basically stops dropping after a certain point. If there are external forces, such as roads that old cars can't drive on, or legal mandates, or much higher insurance costs, that might do it.

[foobar]

I think you are right about the batteries in electric cars.  They are a rapidly evolving technology and the changes are less so about what service they can provide and more about size, weight and importantly cost.  If you can get a car that does 150-200 miles for the price of a car that currently does 80 miles on a charge, then I think people will be tempted to upgrade.

That said, electric cars will still be a small portion of the total market so the people it affects most are early adopters, who are always at the leading edge of technology and always have incentives to upgrade.  It's like the first iPhone buyers in 2007-2010.  Now, there's just less they can add to the phone to make it more desirable than a last years model because most of the important stuff is already there and you have lower marginal benefit for each additional feature.

There is evolution but it isn't super rapid (something like 5% cheaper per year and capacity also goes up by about a similar amount). You will notice the difference between a 10 year old car and a new one but it isn't like the difference between a new smart phone and one from 10 years ago (although the rate of improvement there is also dropping off).

The other thing to consider is that the electronics are less than half the car (depending on how you measure). The depreciation on  your 100k Model S's batteries might be steeper than that of a gas motor and fuel tank but that is only like 15-20k of the car cost.

With all cars (gas, electric, and hybrid) I sort of wonder if lifespan is going to start decreasing. Driving a late 80s early 90s honda 20+ years was pretty standard. Now a days they have added in some many random electronic parts and other things to break I wonder if the useable lifespan is going to start driving down to more like 15 years.

[wtjbatman]

That's where you're wrong. The Nissan Leaf and its 80 mile range is already a joke.

[foobar]

That's where you're wrong. The Nissan Leaf and its 80 mile range is already a joke.

No it is a very good car for a very small segment of the population. It would have served my needs well for example for 10 years  and given the tax breaks it would have been cheaper than the car I drove.  You hear this stuff all the time. No car fits everyone. Imposing your needs on others isn't productive.  If you need a pick up, a prius isn't a good car. If you need a minivan, a civic isn't a good car either. And so on.

[BlueMR2]

That's where you're wrong. The Nissan Leaf and its 80 mile range is already a joke.

I disagree.  It'd be an ideal daily beater for me.  Sufficient range and lower cost.  I very rarely leave town anymore, and when I do it's almost always by airplane.  The cost savings from a low end car for daily use would easily cover an occasional rental as needed for longer trips.

[thelamb]

This has been an interesting thread to read.  I wonder if anyone has any thoughts on how the values will be impacted as the models of car ownership change.  I personally think we'll see more and more of a car subscription model.  It won't be used by everyone, but by enough to warrant attention.  I went carless about 10 months ago and rely on car share and rentals.  The car share part is great for local trips that require carrying no additional payload or extra passengers.  The rental part, for everything else, is a pain in the ass.  I am eagerly waiting for a rental company to fill this gap and make both options more seamless (and in some cities, I'm sure there are better options).  I think they will and the use a car when you need it model will start to become more and more popular and owning a huge hunk of metal will seem more and more silly.  And for the folks that buy into the subscription model, I wonder if it'll all be less a matter of staying up to date on the latest car technology but more of an onus on the "service providers" to stay up to date in order to compete.  Either way, it will all be interesting to watch. 

[ender]

All this is pointless since you need to figure the actual value of what you are purchasing.

Does an iPhone6 really add anything substancial in value over an iPhone4 to most consumers? No.

There is a huge perceived value, sure. But for the overwhelming majority of people in the world who use basic functionality with their electronics there is nearly no reason to upgrade.

Cars as similar. Most of the things people pay for are completely pointless by mustachian standards. The additional benefits of most of the newer cars at this point are pretty similar to electronics.

[sol]

Does an iPhone6 really add anything substancial in value over an iPhone4 to most consumers?

Despite the graphic above showing iphone power increases, I would argue that today's iphone and the iphone3 are functionally equivalent.  Despite having more than 10x the horsepower, they will both give you GPS driving directions and load a web page in a matter of seconds. 

The highly touted specs like processor speed are just there to give advertisers a hook to sink.  Consumers like hearing about the vital improvements of the new model because consumers are eager for the endorphin rush that accompanies unboxing a shiny new toy.  They WANT to waste their money on a device that does the exact same thing as the one they already have. 

Advertisers just need to find a way to give them permission, a way to rationalize their stupidity.  So counting the number of screen inches or cpu clock speed is just an arbitrary metric.  It's no different than when Ford tells you that you need to update your Mustang because the new model has 4 extra hp and 1.5 more inches of leg room.  The car acts the same, but they've found a way to measure it to make it seem like an improvement.   

The real shifts happen between model types, not within model upgrades.  The first iphone and the first Leaf were both functionally different devices that upset the marketplace.  They really worked differently.  I think the Leaf 6 will be as different from the current Leaf as the iphone 6 is from the first iphone:  mostly the same with minor tweaks around the edges but lots of arbitrary measurements used to convince you to upgrade.