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Used-car prices near peak?

By Claes Bell, CFA · Bankrate.com
Saturday, May 21, 2011
Posted: 7 am ET

If you've been sitting on a used car for a while and have been waiting to sell, now is the time.

Used-car prices may be nearing a peak, reports Tom Krishner of the Associated Press:

People are holding on to cars and trucks for about a year longer than they did before the recession, which has created a tight supply of used vehicles. So few are on the market that prices have risen to their highest in at least 16 years.

Dealers are paying an average of $11,660 for a used car or truck, up almost 30 percent since December 2008.

"You're not going to find a situation like this very often," says Jonathan Banks, executive auto analyst for the National Automobile Dealers Association used car pricing guide.

The run-up in prices for used cars has been so dramatic that it almost doesn't make sense to buy them anymore, says David Whiston, an auto analyst for Morningstar. That's probably a good indication that prices are at or near a peak.

"For just a little bit more I can buy a brand-new car," he says. "There's a tipping point. I think we are getting very close to seeing that."

I've been writing about the high used-car prices for a while now, but the continued run-up in used-car prices is still pretty eye-opening. That's great for people sitting on a late-model, low-mileage used car of the type that's in high demand right now.

But most people don't have a used car just sitting idle. If they did sell to take advantage of high used-car prices, they would need to turn around and immediately seek out a replacement. It reminds me a little bit of the paradox that so many experienced during the peak of the housing craze: Even if you sell your house at a very high price, it's hard to clear any real money because you still have to find a place to live in a grossly inflated housing market.

And so it is with those considering selling or trading in their cars. Yes, it's wonderful to get more money for your used car, but if prices for a potential replacement, either new or used, are higher, too, as they are now, you don't really get any benefit.

On balance, I'd say high used-car prices are a net minus for most frugal drivers, because a lot of frugal folks seem to favor buying used cars because it allows you to dodge a good bit of the depreciation that makes car ownership so expensive. Used cars, being cheaper, are easier to buy without an auto loan, which adds hundreds or thousands of dollars to the cost a car. High used-car prices, though, diminish both of those benefits; not only do they increase the likelihood you'll need an auto loan to afford to buy a used car, but they also guarantee a higher rate of depreciation going forward, because used-car prices will eventually fall from today's lofty heights.

What do you think? Are you happy about high used-car prices, or are you hoping to see them fall soon?

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4 Comments
AP
May 23, 2011 at 4:48 pm

I agree. The only person who can benefit from these prices are those folks on the fence about giving up their car to live car-free and switching to alternative transportation like car sharing, public transit, bike, etc. Now is certainly the time to try it. Another good situation to be in would be if you have a compact, low-mile car and are looking to sell to replace with a larger vehicle such as a SUV or minivan.

K Ramirez
May 21, 2011 at 8:51 pm

I love the fact that you pointed out the paradox that owners of high-demand used cars are placed in. We have a 2007 Honda Civic that is paid off and are continually tempted to sell the car (we could pull about $11K at this moment) but we are a family of 4 which includes a 1 1/2 old. It doesn't make sense to sell the car because we would need to buy another car and take on a car loan again. No. We will just live with our humble compact. Childcare in Chicago costs more than we can pull on this car and we don't want more than our mortgage debt.