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Used Cars Take A U-Turn: Prices Finally Fall

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Last summer, used car prices were sky high -- not as high as they'd been earlier in 2012, but close enough that the price gap between "new" and "new used" cars remained very, very narrow

But oh, what a difference 12 months can make. According to Detroit News, used car prices have been in free fall for the past year, and there's no sign of that changing anytime soon.

WHY THE RISE?

There are many reasons for the rise in used car prices, but the biggest by far is the Great Recession. In 2008, auto sales plummeted, hitting rock bottom in 2009. (The notable exception: July/August of 2009, when the Cash-for-Clunkers program caused a surge in new-car purchases -- weirdly, without hurting future sales.)

That, in turn, had a couple of foreseeable effects. First and foremost, automakers dramatically scaled back production, laying the groundwork for a shortage of used cars in subsequent years.

Second, even after the U.S. economy began to improve, consumers remained nervous. Unemployment was still high, wages were stagnant, stock portfolios had been annihilated. Shoppers were understandably wary about shelling out big bucks for a new car or taking on an auto loan they might not be able to repay.  

Many of those shoppers looked instead for used cars, but the auto sales slump and production cutbacks meant that there were fewer used cars to choose from. Demand was up, supply was down, and the free-market economy did the rest.

Climbing gas prices aggravated the problem. We still haven't returned to the record highs seen in 2008, but fuel costs remain high to this day, and in most places, prices haven't fallen below $3 per gallon since 2011. That's forced many auto shoppers to prioritize fuel economy, which has caused the prices of hybrids and other gas-sippers like the Toyota Prius to climb even higher.

WHY THE FALL?

Not surprisingly, the biggest reasons for the drop in used car prices are the end of the Great Recession and upticks in consumer confidence. (FYI, the latter is now poised at levels not seen since 2007, before the recession.)

Employment and consumer sentiment stats are on the rise, meaning that shoppers are more comfortable taking out auto loans on new cars. That has resulted in strong U.S. auto sales, which has, in turn, caused increased auto production and put more used cars on the market. 

As the supply of used cars has grown, prices have fallen. As of June, the average used car in the U.S. cost $11,031 -- a full six percent lower than the high seen in May 2011.

And as our friends at Green Car Reports point out, the most dramatic price drops have been among small and fuel-efficient rides. With customers feeling confident about their ability to pay for gas, the price of a used Toyota Prius has sunk a whopping 15 percent in the past three months alone.

BUY NOW?

If you're an especially frugal shopper, this is all great news, but you might score an even better deal by waiting a few more months. Used car prices tend to fall over the course of the calendar year, and although it's difficult to time things like this, prices often bottom out in the fourth quarter, when next year's models flood dealer lots and winter puts a chill on auto sales. 

If you just can't wait, though, don't worry. We've got a full section of used-car offerings and regular round ups of our best used-car finds.   

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