Used vehicle demand up, supply down; prices soar
Buyers pay most in 7 years as economy steers them from new cars
Robert Snell / The Detroit News

Used car prices are climbing and the pool of available models is drying up one year after the federal "cash for clunkers" program spurred consumers to scrap old cars for new ones.

Used cars are selling for the highest average price in at least seven years, according to Edmunds.com, an online auto consumer guide. Last month, the average price of a three-year-old vehicle spiked 10.3 percent, to $19,248, compared to July 2009.

It's a question of supply and demand.

Supply is down because "cash for clunkers" required old vehicles to be destroyed, rather than allowing them to be resold. In addition, fewer leased vehicles are being turned in and available for sale because automakers all but abandoned leasing during the industry collapse of 2008 and 2009.

Demand, meanwhile, is up as some cautious consumers choose to buy used cars, rather than expensive new ones.

"People are hesitant in making big-ticket purchases, that's why we're seeing a drop-off in new vehicle sales," said Alec Gutierrez, lead analyst for vehicle valuations at consumer guide KBB.com.

"But just because you're hesitant doesn't mean you don't need to buy a vehicle."

Prices have climbed so fast that banks are slow to recognize higher book values for some used vehicles, which complicates the financing process when consumers try to trade in used models and buy new ones, dealers say. That means larger down payments when buyers try to trade in, for example, a used car that may now be worth $10,000 but the bank still values at $9,300. "It's not fun," said George Fowler, general manager of Superior Buick GMC in Dearborn. "We're losing deals when people can't get financed because they can't get close to the book value on their trade-in."

Some analysts see a fluctuating trend in used car prices since "cash for clunkers," the government's $3 billion program that helped sell 677,000 vehicles. Used car prices increased in the months following the end of the program before falling in late 2009. But prices rebounded early this year, amid high unemployment and continued low consumer confidence, Gutierrez said.

The vehicle shortage is forcing dealers to extreme measures -- such as combing online classifieds site Craigslist.com and eBay -- to find used cars to meet demands of customers.
Shock for buyers

The limited supply also is catching some consumers unaware that they may have to cough up more cash when buying used.

"It's a tough time to buy a used car, and it's more important than ever to do your homework before shopping," said Philip Reed Sr., consumer advice editor for Edmunds.com. "For example, decide ahead of time how much you are willing to spend and keep yourself to that limit."

Brittany Chisolm and her grandmother, Bertha Chisolm, had trouble sticking to their budget when they went to the Greater Detroit Auto Auction in Brownstown Township last week. Going in, the Detroiters wanted to spend no more than $2,000 on Brittany's first car, which she needed before starting classes at Wayne State University.

But they were forced to blow the budget by about $700 to win the bidding on a 1999 Pontiac Grand Am.

"It's a little more than I intended to spend," Bertha Chisolm said.

Prices for some types of used vehicles are climbing faster than others, mirroring trends in consumer tastes and lower gas prices. Certain models of sport utility vehicles, crossovers and minivans -- including the Cadillac Escalade, Chevrolet Suburban, Dodge Grand Caravan, BMW X5 and Acura MDX -- were up almost 30 percent or more in July, compared to a year earlier, according to Edmunds.com.

The price tags on compact SUVs were up 14.4 percent while prices in the luxury segment increased 16 percent. Midsize cars, meanwhile, rose a modest 2.3 percent.

The vehicles auctioned in Brownstown Township last week were mostly unwanted dealer trade-ins and old dealer inventory. A stroll along the auction lot reflected the drop in supply and quality, and included a Saturn Ion with a crumpled front end and a Cadillac Catera with a cracked windshield and duct-taped side-view mirror. There were a few gems, including a 2002 Nissan Altima, a few Cadillacs and a Honda Accord.

Jerob Mathis hugged the ground and craned his neck to inspect the belly of a Jeep Grand Cherokee with frame damage. No sale on that one, but he ended up bidding on an Oldsmobile Silhouette minivan and was pleased with the supply of available vehicles.

"It's good, there's a lot of options," said the 23-year-old Detroiter, who needed a car to commute to his new restaurant job.

Mathis was among 128 registered bidders at the Brownstown auction, where 102 vehicles were on the block.

Auctioneer Mike Maltese said, on average, the price of a used car that once sold for $2,000 is up 40 percent and a $3,000 car is now selling at auction for $4,000.Generally speaking, used vehicles coming up for sale now have higher mileage than in previous years, presenting buyers with a new reality, Maltese said.

"In the past, if a car had 92,000 miles on it, you'd say it only has 8,000 miles left on it," said Maltese, 56. "Now, anything under 100,000 miles is gold."