Think used.

The 0% finance-fueled boom in auto sales has produced a glut of used cars selling at bargain prices. Consumers taking advantage of the financing deals have traded in old models, while reduced travel, pared-down rental-car fleets and returned leased vehicles have put even more cars in dealer lots. But the chance to take advantage of these sales is quickly vanishing as prices begin to firm.

"The first quarter is an excellent time to buy," says Paul Taylor, chief economist for the National Automobile Dealers Association. Retail prices are still falling, but only for a couple more months.

That's because at the retail level, used-car depreciation is bottoming. In January 2002, a 1999 model had an average annual depreciation of 18.8%; a year earlier, the average annual depreciation for a 1999 model was just 15.5%, he says. The year-over-year trend favors lower retail prices, but by April, when the depreciation is expected to peak around 20%, prices should stabilize, adds Taylor.

At the wholesale level, where dealers buy used cars at auctions to fill their inventories, prices already have steadied. This is an early indication that the retail market soon could follow suit. To be sure, auctions serve as a major source for used cars, accounting for a third of the cars on dealers' lots, according to the NADA.

Another sign that retail prices will soon increase: Wholesale prices have been rapidly accelerating since November. The Manheim Used Vehicle Value Index, a seasonally adjusted measure of used-car prices at the wholesale level, rose 3.8% from November 2001 to January 2002, the sharpest three-month rise since the index was created in 1995. Still, used-car prices at the wholesale level are relatively low: The index is down 1.9% year over year as of January 2002.

"For a period of time there was a glut, but it was a very short period of time -- September, October and November," says Tom Kontos, vice president of analytical services for Adesa, a subsidiary of Allette ( ALE) and operator of 52 used-car auctions nationwide.

As a result, the average auction price of a used car less than seven years old has started to rise, from $10,252 in November 2001 to $10,948 in January 2002, says Kontos. Average used-car auction prices are expected to slip by only 2% annually this January -- far less than the 5.2% drop in October 2001.


A Fast-Rolling Window of Opportunity
Average auction price of a used car less than seven years old
Year Avg. Auction Price Year Avg. Auction Price % Annual Change
Oct. 2000 $10,865 Oct. 2001 $10,302 -5.2%
Nov. 2000 10,726 Nov. 2001 10,252 -4.4
Dec. 2000 10,751 Dec. 2001 10,319 -4.0
Jan. 2000 11,171 Jan. 2002 10,948* -2.0*
Source: Tom Kontos, Adesa
* -- Estimate

The Iron Is Hot

It's a buyer's market. Prices are low, while selection and availability are excellent. "You've got all the selection that has been created by the three best years in new car sales ever," says Taylor, who points out the 17.1 million new cars sold in 2001 amounted to the second-best sales year ever, following 2000's 17.4 million new cars sold, and 1999 ranks third, with 16.9 million new cars sold.


Feeding the Glut
In with the new
New Cars Sold (in millions) Year
17.4 2000
17.1 2001
16.9 1999
16.1 1986
Source: Paul Taylor, NADA

Because of this, many used cars are more reliable, and less than three years old. And if consumers want even more peace of mind, dealers offer extended warranties or certified preowned vehicles that have passed a factory inspection, Kontos says. "You're going to get the same kind of warranty you get with a new car. And (certified vehicles) are pretty darn airtight."

Some especially good deals: SUVs and minivans, because they are frequently traded in, and midsize cars, which are often used as rental cars, Kontos adds.

Compact cars can give you some good bang for your buck, says Jeff Huang, used-car pricing manager for Edmunds.com, an online automobile pricing source. He recommends the Toyota Corolla and Geo Prism, whose 1999 models are reliable and retail for under $10,000.

Among minivans, Huang says to pass up the popular Honda Odyssey, which is fairly pricey. Indeed, using the appraisal functions available at Edmunds.com, a 1999 Honda Odyssey LX in good condition retails for $21,000 used, just $6,000 less than the comparable 2002 model. That's a depreciation of 29% over a three-year span -- well under the three-year average depreciation of 50%.

Those with their hearts set on an Odyssey should consider a Hyundai Santa Fe SUV, which has similar features and a lower price tag, Huang says.


Sneak Peek
Your best bets in used cars
Vehicle Class Model, Make and Year
Luxury 1997-99 Lexus ES300
Economy 1997-99 Honda Civic
Large Family Sedan 1997-99 Ford Crown Victoria
Midsize Family Sedan 1997-99 Toyota Camry
SUV 1997-99 Honda CR-V
Minivan 1998-99 Toyota Sienna
Pickup 1997-99 Ford F-150
Sporty 1999 Mazda Miata
Source: Edmunds.com

Before You Buy

But beware: Lower used-car prices result in lower trade-in values. Don't be surprised if you get less for your trade-in than you expect. Remember, however, that lower prices ultimately work in your favor. "Let's do the simple math," says Taylor. "If you're buying a car that is twice as expensive as the one you're trading in, you're better off if the price on both cars falls by 5%."

Although you'll get less than you could in an owner-to-owner sale by trading in a car, Huang says you'll also sidestep the hassle of placing ads, showing the car and negotiating with a stranger.

Consumer groups strongly recommend that used-car purchasers do their homework. Even though all 50 states have lemon laws designed to protect consumers from buying defective used cars, Rosemary Shahan, president of Consumers for Auto Reliability and Safety says they can vary widely from state-to-state. "It's still buyer beware," she says.

Shahan advises would-be buyers to have used cars inspected by an independent mechanic to catch hard-to-spot problems such as bent frames or malfunctioning electronics.

Mechanics also can catch one of the biggest trends in used-car fraud: odometer tampering. Some dealers will roll back car mileage to increase the car's value and overcharge consumers. According to carfax.com, a company that performs background checks on used cars, odometer rollbacks cost consumers up to $10 million a year.

Another piece of advice: Make sure you ask whether the car has been in a wreck, was driven recklessly or had any unusual problems, says Jack Gillis, author of The Used Car Book.

But as long as consumers closely inspect their purchases, buying a used car makes sense. "Prices will be good," Kontos says, "but they won't get much better."

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