Why Used Car Prices Are Climbing

Remember the recent Cash for Clunkers program? It’s back but not in the form of government subsidies as before. This time the phrase describes how the used car market has become hot as new car sales have cooled. It’s something to consider when seeking an auto loan.

As the economy tightens, so has the spending among car buyers. As they closely watch how much cash they spend for transportation, they have turned to the used car market when they find it’s time to get another car.

Since the beginning of the year, prices have increased every month. For example, by midyear prices already had increased more than 16 percent since January, according to one report.

For car owners used to the taking their cars to dealers hoping to get the best prices possible when they traded in their vehicles, they have moved into the driver’s seat by selling their own vehicles and commanding prices that they normally wouldn’t get. For example, used-car lot owners are getting up to 5 percent more now than they had in mid-summer. By comparison, private parties at the same time are making sales that are 8 percent higher.

There are a number of reasons that the prices are going up. There are fewer cars on the market, tightening the supply. The situation has become a classic case of supply and demand as prices go higher than they had previously.

Ironically, sales of used vehicles still were expected to drop 16 percent in September while the prices climbed. The problem is not demand; it’s that their supply is lower than it had been.
Consider that the inventory of used vehicles in the United States totaled more than 9 million vehicles in June. A month later the total dropped to 5.7 million units. Within the first few weeks of September there were only 4.5 million units available.

As people watch their spending, they are more likely to hold on to their vehicles longer than they normally would. This is not only true among private parties but also commercial owners such as car rental companies. To keep overall expenses down, they are keeping their vehicles in service longer than before.

At some point what goes up must come down. Although the prices are going higher now, eventually buyers will stop paying the bigger price tags. One estimates that by the second quarter of 2010, prices should go back down to a more normal level.

While a widespread hike in used car prices in the past was viewed by some as an early signal of an increased demand in new vehicles, that may not hold true in the current economy. A tighter credit market likely will keep many people from getting behind the wheels of new vehicles.