The Smoking Hot Market for ‘Gently-Used’ Cars

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Are you in the market for a fuel-efficient used car? Then you probably have competition—not just from other drivers, but from car dealerships.

The auto industry had a strong year of new-auto sales in 2012, and another huge year for car purchases is expected for 2013. Forecasts call for more than 15 million new-car purchases in the U.S. this year, up slightly from 2012 and a sharp rise compared to the 10.5 million new vehicles sold in 2009.

Rising new-car sales generally mean an increased inventory of used cars, thanks to trade-ins. Yet as the Wall Street Journal reported recently, there don’t seem to be nearly enough “gently used” cars around to keep up with marketplace demand. Dealerships have resorted to stalking Craigslist for owners interested in unloading used cars—especially those that are just a few years old. Used-car lot managers are paying good money for these secondhand wheels due to confidence that they’ll still be able to flip them quickly at a profit.

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There are many reasons why there’s something of a shortage of used cars right now. Owners are hanging onto cars longer than ever not only because it’s obviously cheaper than upgrading to a new model, but because automobiles purchased over the last decade or so were built to last for at least 100,000 miles, and often upwards of 200K miles. Because the number of new-car sales dipped during the recession years, there are fewer vehicles than usual that are two or four years old right now. The government’s Cash for Clunkers program also took many used vehicles off the road a few years back.

There’s also just plain enormous demand for used vehicles, as the WSJ pointed out:

While new vehicle sales get a lot of attention because of their connection to auto makers, the used vehicle market is far larger. Last year, U.S. used vehicle sales rose 5% to 40.5 million.

Add all of that up and we’ve got a situation with a high demand and low supply of used cars, at least for the time being. Bizarrely, the situation is also one in which, as Kelley Blue Book noted, new and used versions of the same car model sometimes cost about the same, once dealership incentives for new vehicles are factored in. “Buying a one-year-old used Toyota Corolla or Honda Civic will only save consumers about $20 per month,” the experts at KBB estimate. Meanwhile, “Buyers interested in the Toyota RAV4 or Chevrolet Equinox will find just a $20 gap between new- and used-vehicle payments, while a brand-new Ford Escape commands a more sizable $60 per month premium from the slightly used variant.”

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What’s interesting is that while used-car prices are fairly high nationwide, costs can vary quite a bit from region to region. The New York Times and others highlighted research by CarGurus.com, which indicated that used-car prices tended to be more expensive in mid-size cities with less dealership competition, such as Jackson, Miss., and Montgomery, Ala. Prices are generally cheaper in larger urban areas like Cleveland and Miami.

A Sun Sentinel article “boasted” that South Florida had the country’s least expensive used cars—running 7% less than the national average. Why are prices so cheap? “We have a large older population,” one economist explained, and as they pass away or stop driving, their cars flood the marketplace, driving prices down.

Jorge Salazar-Carrillo, an economics professor at Florida International University, also said that South Florida’s showy culture plays a role:

“It’s that kind of environment,” he said. “You have to show how well you are doing. Most people are never going to see the house you live in and so many people are trying to impress others by the kind of car they are driving.”

(MORE: Why 2013 Will Be Another Huge Year for Car Sales)

The more likely drivers are to want to impress neighbors and business associates, the more likely they are to upgrade their cars regularly—and, of course, to trade in their old cars. Dealerships in the region report that the market’s cheap used-car prices are attracting buyers from as far away as Texas and Alaska.

16 comments
streetsmarts360
streetsmarts360

The new book 'Learn the Car Business for Fun & Profit' on Amazon by Michael J. Sparks, the book is full  of tips and advice when buying one's next car.

bayeranton
bayeranton

how about the 2008 downsizing of the auto industry no pontiacs,hummers ,saturns ford and chrysler also closed plants. what is the total volume of the news cars built after 2008 compaired to before 2008 ?

sictransit5
sictransit5

I had been driving a 1981 Mercedes diesel since 1988, and had kept it in perfect condition, both operating and in appearance. I thought about getting a new VW diesel, as they're so much cleaner, faster, and have modern safety equipment, even if slightly smaller and less comfortable. I began to notice about two years back that the Mercedes was going up in value, and the new VW Jetta and Passat seemed to be very nice cars, and available at good discounts when dealer got stuck with a new one that had a straight shift transmission. When I listed the Mercedes, with several photos, and noted it's 28 mpg both around town or at Interstate speeds, I sold it almost immediately for at least $1,000 more than I would have three years ago. I've also found the going price for my wife's Mazda minivan is essentially the same now as it was when we bought it in 2008 as a like-new 5 y/o used car. The article makes a good point. [P.S. the VW got 44.9 mpg on it's first long trip, 1,300 miles with the cruise set on 82 mph]

mgilbert
mgilbert

What I don't understand is the buyer who spends thousands more for a "fuel efficient" car that will take 100,000 miles or more before any savings is realized.  Why pay $3,000 more for a car that saves you $30 a month on gas???  I drive an Avalon that gets in the low 20s as to MPG.  Yeah, it costs me a few dollars more a month in gas, but the car was thousands cheaper than a Corolla, but is far more comfortable and safe.  Do the math before you buy anything that gets 30 MPG or better.  Unless you drive a lot, it probably won't ever pay for itself.

MyFaceTubes
MyFaceTubes

I've seen stories of people trading in their low mileage 1 or 2 year old cars for $1000 or $2000 less than what they paid and getting the latest model. Many people are buying used for credit reasons... and wind up paying insanely high interest rates, and prices from the dealer.  Buying new is a great idea if you can afford it, have good credit,  and plan on keeping the car for 8 or 10 years. I also think many people tend to "overbuy" their new cars... instead of getting a base or middle tier model... they load it up with options that will loose value quickly. A $150 garmin gps is a much better deal than a flakey in dash OEM unit that costs $2000.  As others have noted, unless you are getting a warranty from a reputable dealer, its just as much as a crap shoot buying a used car from an individual. Has the oil been changed regularly? Has the timing belt been replaced at the correct interval? Before you buy any used car, have your own mechanic give it a through going over. 

JerryHoefen
JerryHoefen

Buying new diffently a bust i have 1991 toyota celica st .After couple repairs new toyota fuel lines an brake lines ,engine head gasket replaced. Im back on road getting 32 mpg with 121000 miles on car .Cost to me was 400 dallors an my time.Car might not have value because kbb doesnt go back tha tfar but i beleive i can get least another 150000 miles out car an money i save in fuel im riding free ride for next 10 year

ShaneMeeker
ShaneMeeker

Why buy a new car that loses half of it's value when you drive it off the lot? Better to buy a used care from an individual for cash.

joeb
joeb

Actually Vic, you missed probably the biggest reason for used vehicles being in demand - remember the government's program (Cash For Clunkers)???? That was a few years back and that took hundreds of thousands of decent used vehicles off the road and turned them into scrap (literally). For what? Oh, to spur the economy. Everybody went out and bought a new vehicle whether they needed to or not. But, tons of good used vehicles were needlessly destroyed.

4 years later after I got this deal, I still brag about the deal I got on my Mazda6. I saved $8,000 by buying it as a 1 year old vehicle rather than new. 4 years later, I now have 60,000 miles on it and the car is in mint condition. It'll be paid off next year and I'll still have a fairly new car at that point. One of the best purchases I've ever made - from a dealer in the western suburbs of St. Louis.

Feel free to pay $30,000+ for a new vehicle. Every time I drive my car I've got a smile on my face because it's a lot of fun to drive and I paid thousands less.....

guzmanchinky
guzmanchinky

Anyone who trades in a car or buys one used from a dealer is getting ripped off. Make the effort, sell it on craigslist and buy another one on craigslist. Educate yourself on how not to get scammed and you can make thousands more by selling privately and save thousands by buying privately. Unless of course you have a desire to fund the dealer's new yacht.

vicmultani
vicmultani

Brad Tuttle,

You are clueless to what you wrote----you just winged 'hearsay'. The shortage of used cars is 1st---due to sunami in japan a couple of years ago---when there was a big shortage of new cars and dealers sold a ton of used cars instead---the market never recovered from that shortage---and 2ndly----right in front of your face 'senor'---SANDY----it totalled about 1/2 to 3/4 of a million cars in a couple of days----.

Used car prices are extremely high and they are not going down anytime soon.

nsr019
nsr019

@mgilbert Early adopters of new technology aren't necessarily looking for the best financial value. Oftentimes, they're paying extra for the novelty and status associated with owning the latest innovations (in this case, being the first guy on the block who can plug in his car at home and remain blissfully ignorant of gas prices, etc.).

This isn't a critique -- it's not much different than paying extra for red paint job that will never repay its cost down the line. And when it comes to things like hybrid engines and batteries, early adopters actually play a very useful role in helping to work out the kinks, so the technology can become affordable and practical for the rest of us in a few years.

notLostInSpace
notLostInSpace

@mgilbert This really is the issue about electric cars, hybrids, etc.  You might pay an extra $20000 for an electric (Volt is about 40k).  For that you could maybe buy 5400 gallons of gas.   If the average user needs 30 gallons per week, it will take him 180 weeks to break even, about 3.5 years.  I argue that 4 years from now we will have vastly improved economics on electrics & hybrids so unless you are very "green" paying extra is not all that smart.   Of course as gas price goes up, the break even shortens and vice-versa.  Other issues remain:  How far can you go on a charge, and aren't the batteries super expensive to replace also?

fenderbender71
fenderbender71

@ShaneMeekerI really don't think that new cars lose that much value after purchase.  Especially, if it is a brand/model that holds value well (i.e., Honda Accord, Jeep Wrangler, etc...).  It really all depends on your situation of course.

zgryphon
zgryphon

@joeb Sure we remember Cash for Clunkers.  It's mentioned in the fourth paragraph.

ada11
ada11

@vicmultani It really depends on the car.  I drive a 2000 Honda Accord, but still get a pretty decent 23 mpg in the city, and close to 30 on the highway.  Great little car, with a six cylinder engine.  Sure, I could probably get a brand new car with lower mileage, but as a student, the switching costs would be cost prohibitive.  So I plan to drive this thing until the wheels fall off.