Are model-year closeouts a good buy?

Availability
Because new or redesigned models are often more sought-after, they can be hard to come by, meaning customers may have to get in line to buy one. With outgoing models, this isn’t a concern. In fact, outgoing models are often a little too available, which is another reason dealers want to move them. Here’s how it works: Dealers borrow money to pay for the cars that sit on their lots. For every day that the cars sit unsold, they accrue more of what the industry calls “floor plan” interest charges. According to the National Automobile Dealers Association, rising interest rates meant that dealers paid an average of about $160 in floor-plan costs for every vehicle they sold in 2006, roughly double the year before. Thus, dealerships want fewer cars on their lots because it means they are spending less money.

Toyota is calling its summer promotion “Lots on the Lots,” a name that suggests Toyota dealers have too much inventory. This is good for potential car buyers, but not so good for Toyota. In fact, it’s symptomatic of larger problems. “Import inventories are higher than we would like, mostly because of softer sales for Honda and Toyota,” said David Cosper, CFO for Sonic Automotive Inc., Charlotte, N.C., the nation’s third-biggest dealership chain. Toyota Division reported that its sales dropped 3.5 percent in July, compared to the same month one year ago. Honda Division said it slipped 1.2 percent in July.

No matter how rational the reasons for buying an outgoing model may be, some people just can’t resist being the first on their block with the latest car. This decision doesn’t have to be purely emotional — solid arguments can be made for holding out for the newest models, even if they cost more.

Reasons to hold out for a new model:

Redesigns
A “redesign” is the industry term for an all-new model with the same name as the old model, and it’s probably one of the top reasons that people choose upcoming models. For example, the 2008 Honda Accord will be an all-new model, with new styling and new features, if we believe the concept car sneak peek at the New York International Auto Show. Honda says that the new Accord is much more aggressively styled and designed for better crash safety and improved gas mileage. If the hype holds true, then buying a new model means getting a better car.

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Resale Value
Simply put, newer vehicles are worth more. For lease customers, it’s especially important to select a car with the best possible residual value, which is the car’s predicted value at the end of the lease based on its depreciation over time. When leasing, the customer is essentially borrowing the difference between the upfront cost and the residual.

According to historical data from Automotive Lease Guide, Santa Barbara, Calif., a widely used residual value benchmark, residual values are best when a model is new, and likely to fall when a model is replaced, or about to be replaced, with an all-new model. Lease numbers then could be a little bit better on the newer model. However, some dealers will occasionally offset the lower value of an outgoing model with a lease discount.

Patience
As usual, dealers will be hesitant to sell below the manufacturer suggested retail price (MSRP) at the start of any model year. But before long, the 2008s are likely to be on sale, too. Edmunds.com said that as of Aug. 1, Mini is the only brand in the industry offering virtually no incentives. In addition, luxury import brands tend to have their biggest discounts in December, when they are trying to hit their calendar-year sales targets. At that point, when the new-model buzz has died down, it’s quite possible to get that new vehicle for less.

Based on historical data from Edmunds.com and CNW Marketing Research, clearance sales usually start closer to the traditional model-year changeover, in September and October. Honda won’t introduce the all-new Accord until October, but it has already started discounting the 2007 model late in the second quarter. “Dealers are pushing an aggressive target” for Accord sales, said Roger Penske, chairman of the Penske Automotive Group in Bloomfield Hills, Mich., the nation’s second-largest dealership chain.

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