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Pricey used cars test conventional wisdom

By Claes Bell · Bankrate.com
Monday, October 25, 2010
Posted: 4 pm ET

The conventional wisdom that buying used cars is always the most frugal option may be tested by rising prices in the U.S. auto resale market.

Edmunds.com estimates the average price paid for a used, three-year old auto has risen $1,471 -- or 8.5 percent -- since last year, reaching $18,832.

The price you'll pay for used SUVs like this Chevy Tahoe may have risen substantially

The price you'll pay for used SUVs like this Chevy Tahoe may have risen substantially

What's behind the rise? Edmunds analysts believe it's a combination of bargain-hunting consumers and the rise of certified pre-owned car sales at dealerships:

"Used cars are in great demand and relatively short supply, so their prices are remarkably high," stated Edmunds.com Analyst Joe Spina. "Automakers understand that many traditional new car buyers are considering used cars, and in response are emphasizing their certified pre-owned car sales programs through which they can earn revenue on used car sales. This effort will keep used car prices high since CPO cars sell for a higher price than comparable noncertified used cars, raising the ceiling for the entire used car market."

Indeed, Edmunds.com estimates the percentage of used cars sold as CPO rose from 13.8 percent to 18.5 percent.

This data is interesting, but it doesn't look like every used car buyer is likely to encounter sharply higher used-car prices than they did last year. And when they do, I'm not sure it will be because of CPO and frugal consumers.

After all, a lot of the biggest price hikes seem to be focused in trucks and SUVs, and I'd be willing to bet that has more to do with gas prices than anything else. After all, the resale values for trucks and SUVs, which generally get poor gas mileage fell sharply in response to the gasoline price spikes of 2008.

Due to the depressed global economy and the resulting lack of demand, gas prices have been fairly stable since then. People, as they are wont to do, have forgotten how painful those big gas bills were back in 2008, so they're more willing to buy SUVs and trucks than they were when gas prices were high.

The other big movers were American brands, which I would wager have benefitted from improved brand perception as American car buyers have taken notice of their reliability and design upgrades.

On the other hand, if your preferred car is a Japanese sedan or station wagon, you might be in luck. The Edmunds.com value estimates have the Honda Accord and the Subaru Outback coming in at a lower than last year.

We had a lot of spirited discussion in the comment section a few months ago about whether buying a new car could be financially smart if it was close to or less than the price of a used model thanks to a generous rebate or other dealer incentive.

I think in the majority of cases, buying a low-mileage used car is probably the better decision. That said, rising used car prices and higher rates on used car loans are going to change the equation a little bit on some vehicles, and refusing to acknowledge that could leave you missing out on getting a new car for the price of a used one.

So what do you think? Is it time for the frugal to consider new cars? Why do you think used cars are getting pricier?

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