Prices for used cars hit a record high in April and are poised to go even higher as production cutbacks during the recession and the more recent Japanese earthquake has made used vehicles a hot commodity as dealers dive into the depleted pool for cars to fill their lots.
The one-two punch has added between $1,500 to $3,000 to the price of some used cars just in the last six months, meaning more money for trade-ins and a tougher time for shoppers looking for a deal.
"The price of used cars is just crazy right now," said Adam Lee, chairman of Maine dealer Lee Auto Malls. His dealership is paying hefty sums for cars it normally might not purchase to have a full inventory. "It can be a piece of junk—cars we used to pay $2,000 or $2,500 for, we are now paying $5,200 to $5,500," Mr. Lee said.
Dealers say the prices of used vehicles will continue to soar as inventories of lower-priced and economy cars shrink. Japanese auto makers Toyota Motor Corp. and Honda Motor Co. have warned their production could be limited through year-end. U.S. dealers say they expect to exhaust existing inventories and face severe shortages of new Japanese cars by July.
The topsy-turvy market has dealers that once quickly dumped trade-ins to wholesalers now holding onto those vehicles to fill out their shrinking inventories. The move is raising the value of trade-ins, helping dealers convince customers to buy brand new cars.
Stephanie Samuels went shopping for a used car but found prices for a late model car nearly as much as for new—and financing for the new car easier to obtain. "I was looking at buying a 2009 Ford Focus which was going to cost me about $16,000," Ms. Samuels said. "But for a couple grand more I could get a new Focus and a better interest rate. So now I am shopping new."
On Friday, wholesale auto auction house Manheim, a unit of Atlanta-based Cox Enterprises Inc., said its index hit 126.6 in April and adjusted wholesale prices of used vehicles rose 5% from a year ago. It's the highest level the index has reached since it started tracking prices in January 1995. The index sets its baseline of 100 at January 1995.
The biggest increases are for fuel-efficient cars and small SUVs, where prices are up as much as 20% since January, according to Kelly Blue Book Co., which tracks trade-in values. For example, it says average trade-in of a mid-size car, such as the 2008 Ford Fusion, rose $1,800 to $11,375 between January and May. Average value of a hybrid car such as a four-door Toyota Prius hatchback jumped $3,775 to $17,040 in those four months.
"It's going to be a seller's market out there," said Alec Gutierrez, Kelly Blue Book's manager of vehicle valuation. "Consumers will probably have to pay a premium for new or used cars but you also have this awkwardness in the market because if you want to wait to buy, but have a car that's worth a lot of money, you may want to trade it in."
The change in used- car pricing began in 2008 as recession and fewer new-car leases pushed used vehicle prices to record lows. North American new-car sales fell to 13.2 million in 2008 from 16.1 million a year earlier, then to 10.4 million in 2009. They only inched up to 11.6 million last year.
High gasoline prices have spurred the run-up. High-demand used vehicles made only in Japan, such as Toyota's Prius, are expected to climb further.
Prius shoppers "may want to hold off until Toyota ramps up its production later in the year," said Jonathan Banks, executive automotive analyst for the National Automobile Dealers Association. "There will be a new car shortage, there is no way around that."
While consumers may suffer, U.S., German and Korean auto manufacturers that are unaffected by the Japanese component shortages and rental car companies will benefit. Hertz Global Holdings Inc. last month raised its outlook for the year in part on high residual values for its rental fleet.
"It's definitely good for new car sales," said Volkswagen of America Chief Executive Jonathan Browning. Higher prices act as a disincentive to buy a used car because new cars come with warranties, better financing rates than used cars. In VW, Toyota and BMW's case, they also come with free maintenance for a several years.
Bill Bushnell, the general manager of Toyota Carlsbad, Carlsbad, Calif., said he normally carries only 100 used cars on his lot. He is in the process of acquiring 300 used cars from others.
"I'm loading up on them now to carry me through the summer," he said. "You will see a huge shortage in used cars come August."