Used Car Shortage? Believe It.

REGION – The hottest car on the market these days? A used one.

Not only are used cars hanging onto their value these days, many are worth more than they were a year ago – and some are even worth more than their new counterparts.

According to a report recently released by the National Automobile Dealers Association (NADA), price changes for one- to five-year old used cars in 2011 have gone up nearly 14 percent from 2010. Used pickup truck prices have gone up nearly four percent, used utility vehicles more than six percent, and used van prices more than seven percent.

Stranger still, NADA found more than 100 used 2011 models on the market today have a clean retail value that surpasses the current 2011 MSRP price – some used models were valued up to 39 percent higher than their original MSRP price.

What's causing this unusual trend?

"It's classic supply and demand," says Mike Marsh, one of the owners of the Marsh Auto Group, which includes the used car dealers Price Point Auto and JD Byrider.

Jonathan Banks, Automotive Analyst for NADA Used Car Guides, agrees. He says there's a major shortage of used cars out there, and it's being propelled by a drop-off in sales of new vehicles in 2008 and 2009.

"Sales dropped off from over 16 million sales to 13.2 million in 2008 and to 10.4 million in 2009," he says. "This essentially eliminated millions of used vehicle from the pool of used models we have available today."

The slowdown in new car sales can be easily traced to the economy. But there's a few more factors at work too.

Marsh says much of the used car market used to come from vehicles coming off leases. But the downturn in the economy hurt the lease programs badly, and the result is that there are far fewer cars coming off lease.

"There's a definite shortage of two- or three-year-old cars," he says.

Why don't dealers make the opportunity for its customers to buy out a lease less attractive? Largely because many can't. Due to the earthquake in Japan, a shortage of new 2011 model year vehicles decreased the availability of used 2011 models. It also prompted dealerships to increase new car prices for these vehicles. And that price increase for new vehicle models may have deterred consumers from the new car market, pushing them into the used car market.

Robert VanCoillie, owner of Van's Autos, says the dip in supply can be further traced to the federal program last year designed to stimulate new car sales.

"It all started from Cash for Clunkers," he says. "Then the economy dipped."

Van's deals mostly in lower-cost vehicles. He says that's a particularly difficult niche to fill these days.

"We used to be able to fill a lot," says VanCoillie. "Now we get maybe 20 [cars to sell] a month. But new cars aren't selling, so trades aren't coming in. The supply is not being replenished."

So what used cars are the most coveted?

Banks says the majority of price increases has affected small and midsize cars. The increases were spread across brands, with the highly desirable hybrids increasing dramatically as gas prices skyrocketed during the second quarter of this year.

"For example, one- to four-year-old Prius models went up by 38 percent in the wholesale market from January 2011 to May/June 2011," Banks says. "Honda Civic and Toyota Corolla one- to four-year-old models went up 20 percent and Chevy Cobalt one- to four-year-old models went up 25 percent during the same period."

While smaller vehicles are hard to find now, Marsh predicts the next niche vehicles to become scarce will be at the other end of the spectrum.

"I think there's going to be a real shortage of trucks and big SUVs," he says. He bases that on the fact that after the gas crunch, fewer of those large vehicles were made, and fewer sold.

Again, the demand is likely to outstrip the supply. While that news might not be welcome to new and used truck dealers, it certainly holds a lot of promise for one end of the industry: repair and maintenance.

Ross Schofield of Marathon Automotive says he's seen more people hold onto their cars longer. Beyond the supply and demand equation, he credits the trend with the general improvement in the quality of domestic vehicles during the past decade.

"Ten or 15 years ago, Toyota and Honda had the best," he says. "Now it's a little tougher [to pick the best cars]. They're all really close in quality. Toyota and Honda are still great cars, but they command a pretty premium price."

If you're looking for a quality car that might be a little more reasonably priced, Schofield suggests an unlikely suspect.

"A car that doesn't have great resale cost is a Buick LeSabre," he says. "You get 33, 34 miles per gallon. It's a quiet car, a safe car.

"If you're looking for a small car, go back to Toyota and Honda. Medium-size – the [Ford] Taurus and some GM cars in that range. Chrysler is OK – their pickups are good."

There's a bright side to all this, at least for customers who already own a car and are looking to buy new now. "It is a great time to buy a new car, since trade-in values are still relatively strong, and we expect manufacturers to start increasing incentives now that the shortage in new vehicle inventory should be ending," Banks says. "Japanese production began to reach normal levels in September, and dealers should be getting that inventory later this month and during November. When that occurs, expect incentives to be very appealing – especially on Toyota and Honda products."

Marsh agrees, but says even though used cars are maintaining their value, it doesn't mean those shopping for used can't find a good car at a good price. They just have to be patient.

"It's not that there aren't good cars. It's just not as open as it was. There's still a selection of vehicles to buy."

You just may have to look a little harder. BN

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