By Albert Bozzo, CNBC Senior Features Editor
Demand may be lacking in many parts of the sluggish US economy, but not for the used car market. But that may not be an altogether good thing. Prices for many used vehicle types are making double-digit gains over a year ago, even showing up in the latest CPI data. Meanwhile dealers are scrambling to find vehicles, especially the most popular SUVs and light trucks. So when Auto Nation ( AN) reports second-quarter earnings Thursday, look for another strong showing, following a 23-percent increase in used-car revenue during the first three months of 2010. "It been a good year for dealers," says Tom Webb, chief economist with Manheim Auto Auctions, one of the major suppliers of used vehicles, who adds that most cars now move on and off the lot in less than the usual 45-60 days. Happy days, however, are not exactly here again. "It's unusual that the market has sustained its strength for so long," says Juan Flores, director of vehicle valuation at Kelley Blue Book. "Six months of sustained strength is an indication that supply constraints clearly had an impact and the unemployment rate had an impact by having consumers choose used over new." In other words, the good news in the used car market is likely bad news for the broader economy, as the woes of the financial crisis and the recession continue. It has also led to a shortage of used inventory on the market that shows little sign of letting up anytime soon. Ford ( F), General Motors and Chrysler quickly slashed production in 2008 as new vehicle sales plunged. Annual auto sales dipped to under 9 million a year in 2008, compared to 15-17 million during the 2004-2007 period. "Every new car represents a potential used car down the road," says Tom Kontos, chief economist and EVP of analytical services at Adessa, another major auto auction firm, who adds that 60 percent of new car purchases involve the trade in of an older, used model. The fact that new car sales rebounded to 10.4 million in 2009 and are running around 11 and a half percent better this year is small consolation, because it will take 2 to 4 years for most of those to hit the used car market.
Some say the requirements of the 2009 "Cash for Clunkers" program exacerbated the problem; for every one of the 700,000 vehicles bought under the rebate program, an older trade-in vehicle was destroyed.
Kontos says the used-car auction market in North America fell from 9.5 million units in 2008 to 8.9 million in 2009. He expects it to "stay at that level for the next couple years." Webb also expects a flat auction market. "Repos were at a record last year, but are down this year. There was also a big reduction in off-rental units in 2009." Auto rental companies, typically big buyers that yield used cars for sale in a year or two, cut orders from the major manufacturers during the worst of the downturn. The 2011-2012 period will also be affected by a reduced number of vehicles with expiring leases, after the standard 3- or 4-year life span. The dynamic is even more pronounced for gas-guzzling vehicles like full-sized vans, SUVs and pick-up trucks. Not only was production cut, retail prices were slashed in the wake of record-high gasoline prices. Now, with fuel prices 30 percent lower, owners are holding on to vehicles they bought on the cheap. The Ford F150, Chevrolet Silverado and Dodge Ram dominate the list of most-searched light trucks on the Kelly's Blue Book website. In June, the average price for a full-size pickup was $12,116 vs. $11,440 in January, according to Adessa's monthly survey. "That segment is absolutely solid," says Flores. "It really retains a following. It almost becomes an investment." At this point, no one is expecting a continuation of the widespread, out-sized gains in many vehicle categories seen at the beginning of the year, but prices are still expected to rise. "It's tougher to find the good, used vehicles people are looking for," says Kontos. "It looks like consumers are willing to pay more for used cars."
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