Prices rise on the used car lot

When Debra Neel went to check out used Jeeps recently in Indianapolis, she left with a bad case of sticker shock.

"We were looking around $4,000 or $5,000 for a good used car for a teenager," but "you can't find them anymore," Neel said. That was readily confirmed by Bob Falcone, president of Falcone Volkswagen, Subaru & Saab in downtown Indianapolis.

Falcone said that a couple of years ago, Neel might have been able to get the 12-year-old Jeep she was considering at her $4,000 to $5,000 price point. The 2000 model on the lot, after all,  has almost 90,000 miles on it and gets only 16 miles to the gallon.

Its price tag today: $13,900.

"It's unbelievable," Falcone acknowledged. He said the used car market is the strongest it has ever been in his 34 years in business.

Prices to soar 30 percent year over year
Dealers and automotive analysts say it's the same across the country. A variety of factors, including the nation's weak economic recovery, high gasoline prices and the March 11 earthquake and tsunami in Japan, have converged in recent weeks to send demand for used vehicles skyrocketing and supply plummeting, said Jeremy Anwyl, chief executive of Edmunds.com, which tracks new and used car prices.

"And that really shot up prices," Anwyl said.

Michael Todd, a sales manager at Fredericktowne Motors in Frederick, Md., said that when dealers go to mass auctions to buy used vehicles, prices are already "in excess of Kelley Blue Book excellent" — the highest "book price" recommended for vehicles in tiptop, almost new condition.

Big retailers like Wal-Mart are thinking small The nation’s most prominent retail giants, Target and Wal-Mart, are testing out smaller versions of their familiar mega-stores.

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By the time those autos are marked up for retail sale on the lot, they can cost far more than what buyers are expecting because "basically, we've thrown the books away," Falcone said.

While that's bad news for used car buyers, it's great news for anyone looking to trade in their old rides.

"This is my 37th year doing this, and I've never seen it like this," said Gerry McCann, sales manager of Duncan Automotive in Blacksburg, Va., who said he and other local dealers were generally paying about 25 percent above book value.

That's in line with the rest of the country, according to the National Automobile Dealers Association, which projected that average June trade-in values for used cars would be up by 18 percent since December and by a full 30 percent over June of last year.

"It's kind of a perfect storm going on right now for consumers," said Bob Penkhus, owner of Bob Penkhus Motor Co. in Colorado Springs, Colo. "We have had more trade-ins in the last 30 days than ever before in our history."

Used sales triple new sales for first time
The spike in demand for used cars started during the recession that began in December 2007, which discouraged would-be purchasers from buying new vehicles. Many of them chose simply to hold on to their current cars, but others switched their focus to something used, dealers and analysts said.

That would explain why, while all passenger vehicle sales and leases — new and used — fell from 2007 to 2009 (when the recession ended), new car transactions dropped by 36 percent, compared to just 14 percent for used cars. (The federal Bureau of Transportation Statistics hasn't yet released final figures for 2010.)

Here's another way to look at those numbers: Sales and leases of new vehicles crashed out at 10.6 million in 2009, while used car transactions leveled off at 35 million. That's a ratio of 3.3-to-1, and it's the first time used car sales have tripled new car sales since the bureau began reporting comparable statistics 21 years ago.

With gas prices remaining high, buyers' overwhelming preference has been fuel-efficient smaller cars — "the economy cars, anywhere from an '01, '02, '03, '04, '05 and '06," Penkhus said.

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But those cars "are very hard to get a hold of," said Falcone, the Indianapolis dealer. "On those, you're bidding against everyone across the country" because sellers are so reluctant to part with them.

Several other factors have squeezed supply. For example, the federally funded Cash for Clunkers program, which paid drivers to turn in their inefficient older used vehicles, "took a lot of older cars off the market," McCann said.

(Specifically, it removed nearly 700,000 used cars and trucks from the marketplace in the single month it was in effect in summer 2009, the Transportation Department reported.)

Rental car companies, meanwhile, cut back drastically on their fleets when the recession hit. Rental companies typically sell of hundreds of thousands of vehicles on the market after two to three years' use; it's the single biggest component of the late-model used car market.

But industry figures compiled by Automotive Fleet magazine show that rental fleets fell from 1.6 million in 2007 to 1.175 million last year — eliminating more than 400,000 available used cars.

Japanese quake damage industry worldwide
And then came the March earthquake in Japan, which devastated production of popular fuel-efficient new Toyotas, Hondas, Nissans and Mazdas, further increasing demand for late-model used versions of those cars, and of parts needed to repair those used models for resale.

"Those companies have been hit by the power outages, the tsunami and even the nuclear issues that are currently going on over there," Penkhus said. "They're affecting everything that comes out of Japan."

Ali Kargaran, general sales manager of Bakersfield Mazda in Bakersfield, Calif., said he's "actually running out of cars," especially the most economical four-cylinder models.

"They basically shut down the factory," Kargaran said. "We can't even order the cars for the next couple months."

Japanese cars aren't the only ones affected. Any car that comes with an antilock brake system or cruise control, even an American-made one, uses computer microchips made in Japan. Parts shortages through the summer will "affect a wide variety of vehicles," said John Pitre, general manager of Motor City Auto Center in Bakersfield.

"It won't be just cars or just trucks or just Nissans or Fords," he said. "It will be a pretty wide range."

In a report last month, automotive analyst R.J. Polk and Co. substantiated that assessment, projecting that "interruptions in the supply of critical parts" would damage "vehicle production in numerous global markets."

J.R. Polk analysis of Japanese auto industry after the quake (.pdf)

The report was optimistic that the industry would eventually recover, but at least for the rest of this year, it said, the impact of the quake would affect "the entire value chain."

And here's the kicker: It's not likely to get much better soon.

If you want to know how the supply of used cars is going to go, you have to look at current sales of new cars, because it "all starts with new cars being fed into the market," said Brad McAreavy, president of the Rochester Auto Dealers Association in Rochester, N.Y. This week, Edmunds.com projected that new car sales would slowly recover but that they were unlikely to get back to pre-recession 2007 numbers until at least 2016.

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"Ultimately," McAreavy said, "it's going to lead to fewer used cars in the market."

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