Why Used-Car Prices Will Stay High

Used_car_lot_2
Mike Hogan didn't expect much for his trade-in, a 13-year-old stick-shift Subaru Forester SUV with 129,000 miles on the odometer. He'd have been happy with $1,500.

The dealer offered $2,750.

"I suppose I undervalue my used cars because I drive them for so long," said Hogan, a 49-year-old who is the director of a domestic violence program in suburban Milwaukee. He handed over the Forester, his wife's car, last January and bought her a brand-new Kia Soul, a car that starts at $13,900 and is one of the cheapest on the market. It was the first new car Hogan bought in more than a dozen years.

"We are both long-time used-car buyers," Hogan wrote in an email. "We most often try to purchase low-mileage used cars that are only one or two model years old. … Given the inflated prices at the time, we did not consider seriously any used models."

Believe it or not, the dealer will likely still make money. Cars.com's national inventory shows dozens of 1999 Subaru Foresters with more than 100,000 miles, and the median listing price is just shy of $5,000.

Three years of depressed new-car sales have driven used prices to historic highs. Recent evidence suggests possible relief, but it will likely take years, not months, before used-car prices come back down.

Low Sales, Fewer Cars
Such is the result of new-car sales below 16 million, which is what we've seen every year since 2008, when the economy crumbled. From 2008 to 2011, recession-wracked car shoppers bought more than 19 million fewer vehicles than during the earlier 2000s. That, in turn, affected the number of used cars on the road today, available to used-car shoppers like Hogan.

New-car sales handily outpaced the number of cars being scrapped by at least 3 million from 2000 to 2007, according to CNW Marketing Research:

Sales vs. Scrappage

*Projected
Sources: Automotive News, CNW Marketing Research, Bloomberg News

The total number of vehicles on the road ballooned over that period. In 2000, the U.S. had some 205 million cars on the road, or 73 cars per 100 Americans, according Polk and census data. By 2007, that number had grown to 241 million cars, or 80 cars for every 100 Americans.

Then came the recession. From 2008 to 2011, Americans bought just 48 million new cars, while junkyards scrapped around 47 million used cars. Predictably, total cars on the road plateaued at around 240 million. The number of Americans driving them continued to grow, however. In 2007 there were 80 cars for every 100 Americans. By 2011, that number had ebbed to 77.

Fewer cars in circulation drove up used-car prices, particularly as drivers hung onto their vehicles longer and longer. A collapse in auto leasing in 2008 exacerbated the situation, leaving the pipeline dry for late-model used cars in 2011 through today — the types of cars Hogan and many others typically zero in on when car shopping.

The result? The average used car went from $9,022 at wholesale in December 2008 to $9,878 three years later, according to Automotive News and ADESA data.

The numbers hit home when you consider Cars.com data for some of the most popular car searches. Look at the Ford F-150, Ford Mustang, Honda Civic, Jeep Grand Cherokee and Toyota Camry. Across the five models, listed prices for used cars 5 years old or newer have increased 29% since April 2009, easily outpacing the relative increase in MSRPs across the same span.

Used_prices

Source: Cars.com data. Each average included used-car listings on 5-year-old and newer cars each April. (For example, April 2009 had 2004-2008 models.)

A Slow Road Back
What needs to happen for the high prices to reverse? Exactly what is happening in 2012 — just more of it over more time. New-car sales are up 10% through the first four months of the year, and analysts surveyed this month by Bloomberg News expect shoppers this year to buy 14.3 million new cars, a 12% gain by year's end. CNW projects around 12 million cars to be scrapped this year, which signals that the total number of cars on the road will climb once again.

Used-car demand has been falling in the meantime, but could that be due to shoppers making the same choice Hogan did? In 2010, shoppers bought 3.2 used cars for every new car, according to CNW. In 2011, that ratio fell to 3.0. The ratio has seasonal variations, but shoppers through April bought 2.3 used cars for every new car — down from 2.4 cars in the first four months of 2011. Any way you slice it, the relative demand for used cars is falling.

That, combined with a slow but steady influx of used cars, means prices will fall ... slowly. Average wholesale used-car prices fell 2% year over year in February, which is the most recent data available from Automotive News. Auto Remarketing, a used-car publication, noted that auto leasing has stabilized — around one in five cars — since early spring 2011.

The relief will be slow. The bulk of 2011's leases won't turn over until 2014 and beyond. February's average wholesale price for a used car is just $31 less than last December's.

The progress is slow, but it might work out in time for Hogan's next car. While his wife drives the Soul, he hopes to get a few more years out of his 2005 Toyota Sienna minivan, which he bought in 2007.

"I am hoping to get another three or four years out of our Toyota Sienna," Hogan wrote. "And I expect, by then, you will be able to get good value in low-mileage used cars again."

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Comments 

Highdesertcat

The biggest factor in driving up the price of used cars is the Cash for Clunkers handouts.

Thousands upon thousands of good used cars were taken off the market and destroyed by C4C.

Those cars would otherwise have been bought by the illegal aliens in the US who cannot qualify for car loans or drivers licenses and pay cash as they go.

Now the millions of illegals in the US are competing to buy whatever used cars are still on the market, mostly from private parties.

In January 2011, after I bought my new truck, my wife told me to get rid of the 11 vehicles and four motorcycles I had parked on my property. They were old but they all ran good.

I placed an ad in our local scandal sheet and sold all of them within a week, all to illegal aliens. Their cash money is as good as anyone else's cash money.

C4C is a prime example of unintended consequences and things gone wrong.

Selling a few thousand new cars resulted in the jacked-up prices on millions of used cars.

Not only did we, the people, pay for those government checks the dealers got for C4C, but now we have to pay more for used cars as well.

Dan

HDC clearly didn't RTFA. The whole "C4C raised the price of used cars" BS has been thoroughly examined and proved to be largely false time and time again.
It did have a short term impact that was fairly significant, but by now impacts such as depressed new car sales (as the above article clearly points out) have far outweighed C4C to the point that C4C is little more than a rounding error in impact.
Where C4C did have a significant impact was on improving the overall efficiency of the US economy. There has already been a large amount of oil saved, and there will continue to be for the next 10 years or more that the new, more fuel efficient cars are on the road instead of the old gas guzzlers. We're all going farther and using less! That means more money to spend on other things and creating jobs for Americans rather than shipping our money overseas and creating jobs in Saudi Arabia.

Highdesertcat

Dan, I read the article, and I stand by the C4C comments. C4C did more damage to the used-car market than any slow down in new-car sales.

I have four brothers who had multi-brand new-car dealerships in four states for more than 30 years and had participated in C4C, even destroying perfectly good affordable used cars they could have retailed.

They were chronically short of used cars not because of slow sales of new cars, but because more individuals were selling their own used cars outright, getting more on the used market than dealers could give them in trade.

I myself bought several used cars off the lemon lot at a nearby air base and had no problem reselling them for a lot more than what I paid for them, mostly to illegal aliens.

The dealers' biggest woe was that they could not get enough used cars to sell to the under-served poor, minorities and illegal alien communities.

It has been my experience that the best sellers for Ford are still the F150, and that the Camry outsold everything in the sedan class, even the Sonata at my brothers' dealerships. Not exactly economical vehicles.

Depressed sales? That may be true in your area, but people with money everywhere continue to buy new cars every day.

People without money or needing to finance did have trouble meeting the stringent loan approval criteria after 2008, and that affected some sales.

In CA, AZ, TX and AL where my brothers had their dealerships, sales of new cars may not have been as brisk as prior to carmageddon, but they sold enough to make a decent living and not have to lay anyone off, although mostly from the sales of the foreign brands like Toyota, Hyundai, Kia, Mazda, Suzuki and Subaru.

Ford, GMC and Buick were slow, that much is true.

And the comment of using less gas may be valid but since when do Americans care about the cost or usage of gas?

C4C had nothing to do with that and had zero effect on that.

Just look at what the best sellers are in America. What we have now is fewer people driving everyday because they're not employed. They have nowhere to go. That accounts for the reduction.

We won't run out of oil for centuries yet! There is no shortage now. It just costs more. No big deal unless you have no money and no job.

And Americans prove over and over again that they'll buy the gas no matter what it costs.

The reason we use less oil now is because so many millions of Americans are unemployed and don't have to drive anywhere. Unemployment!

That's what needs to be fixed and hopefully that will pick up as more people get hired.

And when they get hired they'll start using more gas and buying more new cars.

Judging from new car sales this year, the industry is doing pretty good already and selling more every day.

It's the used market that continues to hurt. That's why used cars cost so much. It's a seller's market and used-car buyers are the ones suffering.

Jevon

I agree with Highdesertcat's assessment. C4C has played a significant role in driving up the cost of used cars because it directly impacted the supply and demand.

Subie_Owner

It helps that the Forester along with the Outback and Legacy are best in class in terms of highest expected resale value according to cars.com. No one will mistake it for a luxury car but it's just so damn functional, useful and reliable I'm not surprised it retains its value so well. My 03 SG Forester has 197k miles under it and still drives sweet as a nut, just had the local dealer go over it with a fine tooth comb and he couldn't find a single thing wrong with it. Ready for the next 100k I guess.

http://www.cars.com/go/advice/Story.jsp?section=buy&subject=best_resale

The dealers' biggest woe was that they could not get enough used cars to sell to the under-served poor, minorities and illegal alien communities.

It has been my experience that the best sellers for Ford are still the F150, and that the Camry outsold everything in the sedan class, even the Sonata at my brothers' dealerships. Not exactly economical vehicles.

Depressed sales? That may be true in your area, but people with money everywhere continue to buy new cars every day.

People without money or needing to finance did have trouble meeting the stringent loan approval criteria after 2008, and that affected some sales.

Highdesertcat

Buying a new car is best because of the new-car factory warranty, IF you can afford it.

Buying used means buying someone else's problems and may be more expensive in the long run.

Right now is the best time to buy a new 2012 regardless of what you need.

They're all discounted because of end-of-model-year sales events, with GM giving the most money on the hood.

Do your research before deciding.

Six

This comment thread is absurd. All the gut feelings, opinions, and guesses in the world are no substitute for data.

Cash for clunkers a huge drag on the used car market? Give me a break, for every car that was scrapped, a new car was purchased. Look at the first chart in the article above, "Sales vs. Scrappage", show me the giant spike in vehicles scrapped. In fact, the number of vehicles scrapped in the years during/since cash for clunkers are lower than they'd previously been for each year 2001-2007.

Next, look at sales. 2001-2007, sales of 16.1-17.4 million per year dropping to 10.4-13.2 2008-2011. There's your break in used cars entering the market. Sales went down. Not due to C4C, not due to illegal aliens or UFOs. It's all in the data.

Six

One more detail - total number of cars scrapped, and purchased due to C4C: 690,114 (source: http://www.dot.gov/affairs/2009/dot13309.htm ).

That was in a year when there were 11.8 million cars scrapped. That means 94% of the cars scrapped that year were not related to C4C.

Used-car pricing tends to spike in April and May, data from car auction company Adesa show. Used-vehicle supplies tend to be low during those months as model year-end sales are still a few months away and few cars are coming off of leases during those months. On the down side, prices for newer used cars are also up, so you'll get more for your car but pay more for the next one. If you can get by a few months without a vehicle, the ideal timing is to sell in May and buy in September.

urdrwho

I refuse to participate in this inflated car market. Thirteen years ago I bought my 90 Jaguar XJ6 for $5,000. It was a 9 out of 10 car and ran great for all these years. Recently I got the bug to look for another Jag. The prices are crazy. I saw one guy trying to sell a 90 XJ6 for $12,000. What a freak'in idiot to ask such a price and it would be an idiot to pay that price. You pay inflated prices and your car is totaled in an accident and you will loose a lot of money. People are selling cars that are banged, bashed, barely running and asking premium prices.

Highdesertcat

If all those C4C cars that were crushed had been left on the used-car market, we would not be paying such exorbitant prices for used cars now.

The comments by those who claim that a new car was sold for every C4C car crushed fails to consider that a very large number of Americans cannot afford to buy new and MUST rely on the used-car market for financial reasons.

Take away a number of potential used cars from that market and what you are left with is higher used-car prices because the demand for them is the same but the supply has been reduced.

Others have brought up that most illegal aliens cannot afford to buy a new car and must rely on the used-car market. Hey, illegals are here. They need transportation too!

Because of the reduced supply of used cars in America there is now competition for them and more than 12 million illegal aliens in America are now underserved.

The vast majority of Americans do not care about the price of gas or gas guzzlers. They're only worried about having affordable transportation.

Illegals are no different. They want affordable transportation as well and can't possibly compete for higher priced used cars with those who can afford the higher prices.

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