Tight supply of used vehicles drives up values

The prices of some used cars have risen to laughable levels. For proof, one need look no further than a 14-year-old Chevrolet Lumina on the lot of Andy Mohr Chevrolet in Plainfield.

It’s not just that the odometer reads 156,706 miles (two-thirds the distance to the moon). Vast sheets of white paint have peeled from its hood, roof and fenders. Corrosion on the leading edge of its nose forms a “rustache” of sorts.

And for this high-mileage, balding beater, Mohr wants a tony $3,000 ($2,995 in dealer-speak). Sure, it needs a paint job, the dealer ad noted, but it “runs great and the transmission shifts great.”

An extreme case, perhaps, but used prices broadly have been climbing: Last month, the average used-car transaction was for $19,345 vs. $16,586 a year earlier, according to Edmunds.com. Last year, used-vehicle prices generally were 10 percent to 15 percent higher than in 2009. The upside for consumers hunting for a new car is that their trade-ins may be worth more. For dealers—at least for those willing to reflect higher values in a trade allowance—this trend could jump-start new-car sales that have stalled when the economy crashed in late 2008.

Higher trade-in equity will be among the key drivers “that will sustain new vehicle sales increases in future months,” National Automobile Dealers Association economist Paul Taylor declared last month.

“Cars are holding better value, which is good for consumers,” said Bill Skillman, a principal of the city’s Ray Skillman chain of new-car dealers. ”It’s probably going to help the new-car business.”

Any help would be welcome. New-vehicle sales of 11.6 million last year were a far cry from the 17 million sold five years earlier. During hard times, buyers turned to used cars more than before. As of last October, used-car sales amounted to 33.6 percent of sales at new-car dealerships versus 28.4 percent in the same month in 2005, according to NADA.

Some dealers have even embraced the potentially lucrative-but-difficult end of the used-vehicle market—that of the credit-challenged. Pearson Ford, in Zionsville, a few years ago opened a “buy here pay here” lot and last year opened a second location, in Plainfield.

“We hope to open up a third location” in the next year or so, said CEO John Pearson.

Andy Mohr Buick GMC in Fishers also has maintained a keen eye for the budget-minded used-car shopper. A lot out back with cars for around $5,000-and-less has become more crowded in recent months.

“We try to keep cars from all different price ranges,” said Steve Faulkner, general manager of Mohr’s GM dealership in Fishers. “Today’s cars, even if they have over 100,000 miles, still have some more use left in them.”

Supply and demand

Lately, vehicles seeing the strongest prices generally inhabit two distinct ends of the market: those with fewer than 50,000 miles and those with 80,000 miles and beyond, said Ben Weir, general manager at Pearson Ford.

Low-mileage used cars are in tight supply. Many fleets, such as rental car companies, are holding onto these cars longer than in past years, Weir noted.

Individuals are also holding onto their cars longer—an average of 63.9 months in mid-2010 from 59.4 months at the same time in 2009 and 54.6 months in early 2008, before the economy tanked, according to R.L. Polk & Co.

“People are keeping their cars longer. There are not as many trade-ins in the system,” Pearson said.

That might explain why one customer who recently took his low-mileage Honda minivan to Penske Honda for service picked up the car to find an unsolicited, cash offer to buy it scrawled on the back of a salesman’s business card.

Higher used-car values could translate into a customer’s ability to negotiate a higher trade-in price, although certain vehicles are more in demand than others, noted Edmunds.com analyst Joe Spina.

For example, Spina has noticed higher values for full-size sport utility vehicles. He figures that’s because many automakers slashed production of the expensive vehicles when the economy tanked, leaving a gap in new supply now that demand is picking up.

Prices of some used cars have finally risen to a threshold where many shoppers now consider new ones instead, said Tom Kontos, chief economist for Carmel-based wholesale auction chain Adesa Inc.

Buyers take into account lower maintenance costs of a new model and the benefit of a new-car warranty, he said.

But Kontos said there’s a big caveat. Many consumers still have sour credit, which makes borrowing more money for a new car a challenge. They’ll buy a used car instead.

Used prices at peak?

As for used-car prices ahead, Kontos is still crunching December data.

“We don’t see [values] falling off a cliff, nor do we see them continuing to rise,” he said.

Edmunds’ Spina concurs. He sees used-car values—from a “pretty dramatic” rise in early 2010—flattening out in 2011. They should then fall as conditions improve in the new-car segment and more trades flood in.

Skillman said used-car values in previous years were “way too cheap. They were on the stupid side cheap.”

So he’s upbeat that the rise in used values will encourage buyers to trade for new.

“I think the new-car business will be much better this year,” he said.

New-car dealers in Indiana generate annual sales of nearly $9 billion, according to the Automobile Dealers Association of Indiana.•