Why are Used Car Prices so High?

The prices of used cars began to go up when the recession hit in 2008. That rise in prices was due to the decrease in quality late model used cars entering the market coupled with an increase in the demand for them. Now that the recession is ending and new cars are selling again, it would seem that the prices of used cars should start to go down. That is not what is happening. In fact, used car prices are actually going higher. The question is why? The simply answer is that there are just not enough good used cars in the market to meet the increasing demand.

Auto makers produced six million fewer new cars during the recession. As a result, there are six million less quality used cars that can enter the market. The 2009 Cash for Clunkers program also decreased the number of used cars entering the market. While the program was designed to promote the sale of new cars, it also took almost 700,000 used cars that were drivable off the road and destroyed them. Had they not been destroyed, those older cars would have made their way to used car lots.

Used car dealers get their cars from four places. One of biggest suppliers of late model used cars was from car rental agencies and companies that have fleet vehicles. Before the recession, these places would replace their older car every two years. Now, they are replacing them every four or five years. Many companies have eliminated fleet cars entirely. Another source of late model vehicles for dealers is leased cars that are at the end of their lease. The banking crisis that started the recession forced car manufacturers and lenders to stop leasing cars because of the risk. Leasing is now back, but those cars will not enter the used car market for at least two or three more years.

Another source of vehicles for used car dealerships is through trade-ins. People are keeping their cars longer now. The average is eleven years. Therefore, the quality of the trade-ins has dropped significantly. Car dealers are not interested in old cars because it is hard to sell them.

A forth source of used cars is through repossessions. Lenders have had much stricter loan requirements during the recession. As a result, fewer risky car loans were made. For that reason the number of repossessed cars is down significantly.

Many of those lenders have now relaxed the requirements so that more people will qualify for a car loan. The more people that are in the market for late model used cars the higher the prices will be. The rising price of gas is another thing that is fueling the demand for smaller, more fuel efficient used cars. That demand is really causing the cost of four cylinder cars and hybrids to escalate.

With the exception of trade-ins, used car dealers get their inventory from auctions. The prices of late model, fuel efficient cars, light trucks and suvs has soared in last year. The dealer has no choice but to pass that cost along to the customer.