Why Used Car Prices Are So High

May 19, 2011

Have you noticed how high used car prices are getting? Last year you could buy a two-year-old Toyota Prius and pay in the mid-teens or less.  Now, expect to pay in the upper teens for the same car, depending on where in the country you live.

There is no doubt that a shortage of good used cars exists. Here are some recent observations:

--I recently drove past a used car lots that was half empty. When I stopped to ask the owner why his inventory was so low he just shook his head and said, “I get most of my cars at the wholesale auction. Prices are now so high there that I’m afraid I’ll lose my shirt by the time I do a few repairs, clean them up, and put them out for sale. If I don’t get more cars soon I won’t be able to stay in business.”

--A friend of mine is used car manager for a major car dealer. He is desperately searching for used cars but can never find enough. The dealership relies on having used cars to meet their basic sales and profit requirements each month. He is working longer hours and finding fewer cars.

--I talked to my neighborhood mechanic yesterday. He told me that his business is booming. "People are not just keeping older cars longer," he said, "they are dragging out unused cars from the back of the garage and fixing them up rather than buying new ones or paying inflated prices for pre-owned vehicles."

So why are used car prices so high? There are a number of reasons and they all have to do with supply and demand.

When all hell broke loose

The U.S. auto industry was doing well in 2006 when auto sales hit a record 16.5 million units for the year. Lots of new car sales meant more than enough used cars were traded in. Car dealers rely on trade-ins to provide much of their pre-owned inventory.

However, things began to decline in 2007 when national sales slipped to 16.1 million vehicles. Then in 2008, things got much worse when the economy collapsed; sales fell to 13.2 million. A shocked U.S. car industry had no idea how bad things were going to get. It felt like all hell broke loose in 2009 when just 10.4 million units were sold at dealerships around the country.

As new car sales continued to drop—including fewer new vehicle lease agreements—year by year it reduced the number of used cars available for sale. Dealers were also receiving fewer lease returns, which are preferred over all other forms of used cars—even trade-ins.

If that weren’t bad enough, in 2009 the Cash for Clunkers program pulled 700,000 used vehicles off the road, further reducing supplies. These were vehicles many dealers would gladly have put in stock to meet the increasing demand for affordable cars, trucks, and SUVs. And the economic downturn translated into lower inventories for car rental companies. This meant fewer rental cars being sold back into the marketplace where car dealers pick them up for resale.

What the future holds

With more cooperative lenders and lower interest rates, the U.S. auto industry is expecting to sell 13.2 million vehicles this year. Depending upon which prognosticator you believe, and how well the economy recovers, we can expect sales to increase anywhere from 14.5 to 16 million vehicles by 2013. That may help ease used car shortages in the long-term, but it does little to help economically depressed car buyers who need to replace their aging transportation in the coming weeks or months.

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