Modeling “Sporty” Ford
Mustang GT 2010
When it comes to affordable sports cars, Americans’ love
affair with the Ford Mustang family knows no bounds. Mustang’s 2010 GT coupe, encompassing its fifth generation design, muscular 315 HP, 4.6L V8 engine with a manual
transmission, offered sports car lovers a scintillating and awe-inspiring
choice and experience, leaving a big portion of the competition far behind.
While the standard GT package provided for 5-speed manual
transmission, leather appointment, advanced power package, climate control,
heated mirror, eight-speaker entertainment, Bluetooth, etc., automatic
transmission, glass roof, convertible accessory and read video camera were popular
options. Also, 3-year/36K miles basic and 5-year/60K miles drive-train with
roadside assistance were standard warranties.
Modeling Step 1
(Correlation Matrix)
 |
| (Click on the image to enlarge) |
The above correlation matrix demonstrates that the Dealer
Price (Dealer Pr) has the highest (negative) correlation with Miles, meaning the
higher miles on the vehicles tend to dampen the dealers’ asking prices in the
market.
Mustang GT Convertibles have more positive impact on the
price than the regular coupes. While the GTs without any reported accidents (Accident)
are expected to fetch higher price than their counterparts, the high mileage
ones would be adversely impacted due to their high negative collinearity with
Miles. Likewise, the single owner (Owner) GTs would do better price-wise than
their counterparts. Though the better maintained GTs (Service) are expected to have
positive effect on price, its high multi-collinearity with Miles and Accident
would drain its impact. Warranty is virtually uncorrelated with price.
The above scatter graph depicts the usual negative relationship
between the Dealer Prices and Miles. Prices generally decrease commensurately
with the increasing mileage. Thus far, this graph is the only one that has
demonstrated somewhat logarithmic (non-linear) relationship; nonetheless, this fit
would be much tighter with the trimming of some outliers, thus paving the way for
a much higher R-square, perhaps to a more customary level.
Modeling Step 2 (Multiple Regression
Analysis)
The model R-square – 0.9595472 – is reasonably high, with
potential for even higher R-square if the model is rerun without the outliers.
The above MRA output confirms the negative contributory
relationship between Miles and the dependent variable, meaning higher miles are
negatively contributing to the predicted prices. Though the Miles coefficient
is seemingly small, it will nonetheless have reasonable impact on cars with
high mileage; for example, the predicted price of a 2010 GT with 100,000 miles will
be reduced by -$2,429 (-0.024289 * 100,000), as opposed to a mere -$486 for a
competing one with only 20,000 miles on it.
Accident is the most important independent variable (highest
t stat and lowest P-value) in the model followed by Convertible, Owner, Service
and Warranty. Again, the standout presence of Accident points to the fact that it
provides the maximum price differentiation between the accident-free and accident-encountered
groups. Simply put, the future owners of these fairly late model sports cars are
most likely risk-averse, and as a result are unwilling to pay the high market
price either for the high mileage cars or those that have encountered major damages
or accidents.
To interpret the other Model coefficients: Convertible GTs
are retaining more value than the regular coupes; the single owner vehicles are
preferred to multiple owners’; the well-maintained cars provide the necessary
peace of mind for the buyers as they are willing to pay for the good service
(service maintenance by the manual, garage kept, etc.), while any warranty services
are enhancing predicted prices.
The MRA Model is confirming the presage of the correlation
matrix that Service and Warranty are the two least contributing predictors.
Again, higher miles and accidents have perceptibly negative impacts on predicted
prices.
Modeling Step 3 (Analysis of Model
Estimates)
The above percentile graph shows that while the model
estimates are significantly lower at the bottom end of the curve (5th and
10th), they are however in tandem between 25th and 90th,
though diverging slightly at the 95th. The fact that the model has
been predicting lower prices at the bottom end of the curve points to the
above-the-market asking prices for the lower end units, perhaps those with multiple
incidences – accidents on record, multiple ownership, inadequate maintenance
or high mileage.
On the other hand, this additionally proves that the model
estimates could help both consumers and dealers to quickly converge on the same
page as these estimates are independently derived. Likewise, the private
sellers can validate their subject prices before accepting the trade-in values
from the dealers, considering that these are generally high-priced sports
vehicles and local comps could be few and far between.
The above Warranty table shows that while the dealers are
over-pricing the vehicles without any warranty (None), they are however
under-pricing the vehicles under warranty – factory re-certified (Certified) or
those with in-house (Dealer) warranties. Specifically, they are significantly
under-pricing Certified and Dealer warranty vehicles roughly $1,550 and $1,000,
respectively. On the other hand, the Model is showing that the Vehicles without
any warranty are the least preferred, thus predicting roughly $700 below the
current asking. Interestingly, the vehicles with the dealer warranty have the
highest mileage – 28K more than the Certified inventory.
While the Model is confirming the dealer pricing for the fleet
without any reported accidents (None), the dealers are however way over-pricing
the ones with the reported accidents (Yes), even those with the minor damages.
Therefore, by having the model estimates placed alongside the dealer prices,
consumers could save on average $3,916 (16,465 – 12,549) and $1,434 (15,749 –
14,315), respectively. More troublingly, the mileage difference is incredible
between the yea and the nay categories.
The Model also proves that the one owner vehicles are
expected to fetch premium prices, though the dealers are pricing the 2-3
ownership cars higher than the original owners’ with fewer miles. Vehicles with
4+ owners are also priced above the market. Again, this transposition of prices
could be avoided if they were to subscribe to some legitimate model values.
Moreover, in this internet day and age, by having the model estimates available
side-by-side the dealer prices, dealers would protect average consumers as well
as their reputation and thus ease deal-making by eliminating all unnecessary
price haggling back and forth.
Though the dealers are asking more or less the right market price
for the well-maintained vehicles, they are however asking $2,500 more for the
vehicles with sub-par service history. Needless to say, absent some model values
alongside the dealer prices, buyers would continue to overpay for the lesser
maintained vehicles. Therefore, this industry needs to be reinvented by having
to publish a set of independent model values side-by-side the dealer’s asking
prices.
The above Miles table illustrates the price comparison by having
miles broken down into four (equal) quartiles. While the Model is forecasting the
inverse relationship between the predicted prices and mileage, dealers’ asking
prices are not too far off, either. Dealer prices in the low mileage quartile
are somewhat higher than the model estimates, apparently stemming from the lure
of the low mileage vehicles. The fact that the consumers are forced to pay an
unwarranted premium could be avoided if the model estimates were also published
alongside the dealer prices.
The Model is proving that the location arbitrage is virtually
non-existent nationally, though the West Coast dealers are asking somewhat
higher prices than the corresponding model estimates. The reason the Model is
estimating the lowest prices for the West Coast cars is the highest average
mileage on those vehicles; for instance, West’s average mileage of 69,904 is
significantly higher than Central’s 50,428 or East’s 52,897 while the price gap
narrows between West’s and South’s due to the tapering of their respective mileages.
The Convertible GTs (Yes), along with their lower mileage, are
fetching premium prices than the regular coupes. While the Model is predicting
even higher prices for them, it is lowering the threshold for the competing
regulars. Of course, the Convertible was an option for the new 2010 GTs with a
MSRP of $33,395, as compared regular GT coupe’s $28,395. A part of the original
premium might still be carrying over.
Of course, when the comparisons are not necessarily
apples-to-apples, normalized metrics are in order. Decay in value could be one
such metric. Applying the above figures, the Convertible has lost 34.50% (33,395-21,883)/33,395
in value off the original MSRP while the regular coupe has stacked up ever
higher decay, i.e., 40% (28,395-17,067)/28,395.
The above data sample demonstrates that the dealers are randomly
over-pricing the GTs given the general paucity of the late models. Unlike the
previously researched Makes/Models where the Model found that the dealers were
routinely over-pricing the vehicles with the reported accidents, the GTs are
seemingly all over the map, so to say.
Here is a quick breakdown of the 10-case
sample:
·
5
(50%) vehicles have no record of accidents;
·
5
(50%) vehicles had 2 prior owners;
·
6
(60%) vehicles have ‘Excellent’ service history;
·
7
(70%) vehicles have under 60K miles (drive-train);
·
8
(80%) vehicles have no warranty (yet being over-priced);
·
9
(90%) vehicles are regular GT coupes (yet being over-priced).
If the model estimates were to be placed alongside the dealer
prices, buyers would immediately know the extent of the over-pricing. Ironically,
the worst sample case SL# 1 (No Warranty, Accident, 4 Owners, Low Service Maintenance
and Highest Mileage) is the most over-priced!
When the modeling process identifies the under-priced cars,
it’s pointing to some “upfront” savings for the consumers. This is an area
where the dealers would be most benefited if they were to subscribe to some model
estimates. The above sample shows that the dealers are perhaps (because not a
scientifically-drawn sample) under-pricing their cream of the crop: Accident-free
vehicles (100% in this sample), with the widest spreads attributed to those that
are additionally backed by excellent service history (90%), 1-to-2 prior
ownerships (80%), warranties (50%). higher value convertibles (40%) and lower
mileage (30%).
As indicated before, now and then, the dealer prices could
consciously be lower to factor in some minor negatives (rarely captured in the
modeling database) or to address some imminent psychological breakpoints. SL # 1
could be one such psychological case where the dealer might have consciously
lowered the price (2nd lowest price) as the vehicle is on the verge of reaching
100K miles, a big psychological milestone.
Given the everlasting popularity of the Ford Mustang family
of sports cars, the 2010 GT model has steadfastly remained one of the most
sought after “affordable” late model sports cars on the market today.
Copyrighted Material
The Book (Pricing Pre-owned Auto Markets) is Available Now
No comments:
Post a Comment