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Image: Used car lot
Scott Olson  /  Getty Images
The spike in demand for used cars started during the recession that began in December 2007, which discouraged would-be purchasers from buying new vehicles.
By M. Alex Johnson Reporter
msnbc.com
updated 6/9/2011 9:50:47 AM ET 2011-06-09T13:50:47

When Debra Neel went to check out used Jeeps recently in Indianapolis, she left with a bad case of sticker shock.

"We were looking around $4,000 or $5,000 for a good used car for a teenager," but "you can't find them anymore," Neel said. That was readily confirmed by Bob Falcone, president of Falcone Volkswagen, Subaru & Saab in downtown Indianapolis.

Falcone said that a couple of years ago, Neel might have been able to get the 12-year-old Jeep she was considering at her $4,000 to $5,000 price point. The 2000 model on the lot, after all,  has almost 90,000 miles on it and gets only 16 miles to the gallon.

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Its price tag today: $13,900.

"It's unbelievable," Falcone acknowledged. He said the used car market is the strongest it has ever been in his 34 years in business.

Prices to soar 30 percent year over year
Dealers and automotive analysts say it's the same across the country. A variety of factors, including the nation's weak economic recovery, high gasoline prices and the March 11 earthquake and tsunami in Japan, have converged in recent weeks to send demand for used vehicles skyrocketing and supply plummeting, said Jeremy Anwyl, chief executive of Edmunds.com, which tracks new and used car prices.

"And that really shot up prices," Anwyl said.

Michael Todd, a sales manager at Fredericktowne Motors in Frederick, Md., said that when dealers go to mass auctions to buy used vehicles, prices are already "in excess of Kelley Blue Book excellent" — the highest "book price" recommended for vehicles in tiptop, almost new condition.

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By the time those autos are marked up for retail sale on the lot, they can cost far more than what buyers are expecting because "basically, we've thrown the books away," Falcone said.

While that's bad news for used car buyers, it's great news for anyone looking to trade in their old rides.

"This is my 37th year doing this, and I've never seen it like this," said Gerry McCann, sales manager of Duncan Automotive in Blacksburg, Va., who said he and other local dealers were generally paying about 25 percent above book value.

That's in line with the rest of the country, according to the National Automobile Dealers Association, which projected that average June trade-in values for used cars would be up by 18 percent since December and by a full 30 percent over June of last year.

"It's kind of a perfect storm going on right now for consumers," said Bob Penkhus, owner of Bob Penkhus Motor Co. in Colorado Springs, Colo. "We have had more trade-ins in the last 30 days than ever before in our history."

Used sales triple new sales for first time
The spike in demand for used cars started during the recession that began in December 2007, which discouraged would-be purchasers from buying new vehicles. Many of them chose simply to hold on to their current cars, but others switched their focus to something used, dealers and analysts said.

That would explain why, while all passenger vehicle sales and leases — new and used — fell from 2007 to 2009 (when the recession ended), new car transactions dropped by 36 percent, compared to just 14 percent for used cars. (The federal Bureau of Transportation Statistics hasn't yet released final figures for 2010.)

Story: Mini breaks out of the small-car ghetto

Here's another way to look at those numbers: Sales and leases of new vehicles crashed out at 10.6 million in 2009, while used car transactions leveled off at 35 million. That's a ratio of 3.3-to-1, and it's the first time used car sales have tripled new car sales since the bureau began reporting comparable statistics 21 years ago.

With gas prices remaining high, buyers' overwhelming preference has been fuel-efficient smaller cars — "the economy cars, anywhere from an '01, '02, '03, '04, '05 and '06," Penkhus said.

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But those cars "are very hard to get a hold of," said Falcone, the Indianapolis dealer. "On those, you're bidding against everyone across the country" because sellers are so reluctant to part with them.

Several other factors have squeezed supply. For example, the federally funded Cash for Clunkers program, which paid drivers to turn in their inefficient older used vehicles, "took a lot of older cars off the market," McCann said.

(Specifically, it removed nearly 700,000 used cars and trucks from the marketplace in the single month it was in effect in summer 2009, the Transportation Department reported.)

Rental car companies, meanwhile, cut back drastically on their fleets when the recession hit. Rental companies typically sell of hundreds of thousands of vehicles on the market after two to three years' use; it's the single biggest component of the late-model used car market.

But industry figures compiled by Automotive Fleet magazine show that rental fleets fell from 1.6 million in 2007 to 1.175 million last year — eliminating more than 400,000 available used cars.

Japanese quake damage industry worldwide
And then came the March earthquake in Japan, which devastated production of popular fuel-efficient new Toyotas, Hondas, Nissans and Mazdas, further increasing demand for late-model used versions of those cars, and of parts needed to repair those used models for resale.

"Those companies have been hit by the power outages, the tsunami and even the nuclear issues that are currently going on over there," Penkhus said. "They're affecting everything that comes out of Japan."

Story: The hollowing out of Japan’s auto industry

Ali Kargaran, general sales manager of Bakersfield Mazda in Bakersfield, Calif., said he's "actually running out of cars," especially the most economical four-cylinder models.

"They basically shut down the factory," Kargaran said. "We can't even order the cars for the next couple months."

Japanese cars aren't the only ones affected. Any car that comes with an antilock brake system or cruise control, even an American-made one, uses computer microchips made in Japan. Parts shortages through the summer will "affect a wide variety of vehicles," said John Pitre, general manager of Motor City Auto Center in Bakersfield.

"It won't be just cars or just trucks or just Nissans or Fords," he said. "It will be a pretty wide range."

In a report last month, automotive analyst R.J. Polk and Co. substantiated that assessment, projecting that "interruptions in the supply of critical parts" would damage "vehicle production in numerous global markets."

J.R. Polk analysis of Japanese auto industry after the quake (.pdf)

The report was optimistic that the industry would eventually recover, but at least for the rest of this year, it said, the impact of the quake would affect "the entire value chain."

And here's the kicker: It's not likely to get much better soon.

If you want to know how the supply of used cars is going to go, you have to look at current sales of new cars, because it "all starts with new cars being fed into the market," said Brad McAreavy, president of the Rochester Auto Dealers Association in Rochester, N.Y. This week, Edmunds.com projected that new car sales would slowly recover but that they were unlikely to get back to pre-recession 2007 numbers until at least 2016.

US auto sales cooled in May

"Ultimately," McAreavy said, "it's going to lead to fewer used cars in the market."

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Explainer: Ten most improved cars of 2011

  • Image: The 2011 Explorer on the all-media drive in San Diego, Californi
    Ford  /  Wieck
    Ford is selling Explorers as fast as it can build them.

    Among the crop of new cars out for 2011 it’s worth singling out those vehicles that have shown significant improvement.

    Like a sports team, when it comes to picking the best car you’ve got your veteran players who everyone expects to be great, and a couple who have gotten complacent and gone into decline but who still enjoy a reputation earned in better times.

    At the same time, some of the guys who have been around awhile and haven’t really performed like pros have really gotten their acts together during the off-season, returning with a form that is getting attention around the league.

    Here are our 10 candidates for the most improved car.

  • Buick Regal

    Buick

    Buick Regal? Isn't that the official car of Florida's early bird specials? Are the seats made so the driver isn't visible from the car behind? This may have been true enough for the old Regal, but no more. The sleek, racy new Regal looks like nothing that would have graced Buick showroom just a few years ago. But two things have changed that. First was Buick's rise in China, where the brand is a top seller and the Regal is seen as a crucial ingredient to General Motors' ongoing success in the market. The other thing that happened was that the Saturn brand was shuttered in the GM bankruptcy, leaving GM with a model that had been planned for the Saturn division that was all dressed up with no place to go. So it became a Buick.

  • Chevrolet Cruze

    GM  /  Wieck

    OK, there was not an old Chevy Cruze for the new one to improve upon. But the Cruze replaced the Cobalt, which had some sound fundamentals, but was poorly executed and detailed. The new car enjoys a much bigger budget, as GM splurged on some nice cabin appointments so that the interior approaches within shouting distance of luxurious rather than living directly in downtown heinous. The Cruze is also sturdily constructed using large amounts of high-strength steel to eliminate the kinds of wobbles and rattles that have long plagued domestic economy models. And Chevy spared no expense outfitting the Cruz with safety equipment, making it a vastly superior option for young drivers.

  • Dodge Durango

    AJMueller  /  Dodge

    The original Durango was a monstrous, thirsty body-on-frame truck that had worse handling and fuel economy than the larger Chevy Suburban, but with less space inside than the Tahoe. The new Durango is built on a new unibody chassis shared with the Mercedes-Benz M-Class and R-Class crossover SUVs and it is outfitted with either the company’s new 3.6-liter Pentastar V6 engine or the latest version of the company’s heralded Hemi V8, with cylinder deactivation for better gas mileage when cruising on the highway. Mercedes’ ride and Hemi power? That’s a tough-to-beat combination.

  • Dodge Journey

    Dodge briefly ran tongue-in-cheek television commercials touting the Journey mid-sized crossover as the best car in the world. It was a joke because the old Journey obviously wasn’t, with its appalling cabin materials and thirsty V6 engine.

    But the 2011 Journey was the recipient of the company’s most lavish makeover, with a positively opulent interior that welcomes customers inside. Under the hood it also gets the new 3.6-liter Pentastar V6, with its accompanying improvements in power, smoothness and efficiency.

  • Ford Explorer

    Ford  /  Wieck

    This one-time darling of suburbia had fallen on hard times, as consumers turned their backs on truck-derived SUVs in favor of jacked-up station wagons. Still, the name held some equity, so while the crossover SUV Ford Freestyle and Taurus X flopped in the showroom, the thinking was that the Explorer name could attract buyers if it were a crossover. That guess has proved correct, as Ford is selling Explorers as fast as it can build them. The Explorer isn't just an improvement on the old trucky model, it is also an improvement on the Taurus X, the vehicle from which the new Explorer was derived. In an instance of less being more, a new Explorer based on the old Taurus X replaces both of those models and is more popular than they were combined.

  • Ford Focus

    Ford  /  Wieck

    Ford’s track record in the compact segment is so abysmal that the company has changed the name of its small model repeatedly over the years, from Falcon to Pinto to Escort to Focus. For a brief moment the company got the Focus right when it imported the European design to the U.S. 1999 and reached its pinnacle with the SVT high-performance edition in 2001. Unfortunately the company dropped the ball when the Focus reached the end of its natural lifespan by replacing it with an all-new car in other markets, but introducing a warmed over version with homely sedan styling for the U.S.

    For 2012 the all-new global Focus is the best in its segment, with refined materials and options that are normally available only in higher segments. Look for the Focus to be one of Ford’s sales heroes this year.

  • Hyundai Elantra

    Here’s a car that largely epitomized cheapness for many years. The old models were ugly and poorly made. But Hyundai’s dramatic turnaround in recent years included its compact model, and the previous edition was solid. The new one is more than that, it is a contender, along with the Ford Focus, for best-in-class honors in the compact segment. Hyundai’s astonishing improvements in powertrain engineering are a big reason why the Elantra is so improved. Its new 145-hp 1.8-liter engine matches with a standard six-speed transmission (either manual or automatic) to produce an impressive 40 mpg in highway driving without the use of hybrid technology or any special high-efficiency options that add cost.

  • Kia Sorento

    Jae C. Hong  /  AP

    When Hyundai was selling jalopies that quickly fell apart, one thing kept the brand out of last place in various quality and satisfaction surveys: Kia. That performance wasn’t sustainable, so Kia eventually fell into bankruptcy, from whence it was bought by Hyundai. Improbably, this combination has worked wonders for both companies.

    The new Kia Sorento is a sleek, stylish crossover SUV that has been winning plaudits from reviewers and now for 2012 it gains the super-efficient corporate 2.4-liter four-cylinder engine which boosts its fuel economy and performance.

    The Sorento is also Kia’s first U.S.-built product, coming from the company’s new plan in West Point, Ga. highway.

  • Kia Optima

    Kia

    Kia also gets its own version of the widely-acclaimed Hyundai Sonata, which was new last year. The company’s mid-sized sedan goes from being an afterthought in the segment to a legitimate player, courtesy of its German styling (penned by an ex-Audi designer) and Korean engineering. The 200-hp 2.4-liter engine matches to a six-speed automatic or manual to produce 35 mpg on the highway.

    Sporty turbocharged and thrifty hybrid models are also available, helping Kia press its assault on a market where it has been largely overlooked for years.

  • Jeep Grand Cherokee

    Jeep

    The Jeep Grand Cherokee suffered during the years when the Jeep brand was controlled by then-DaimlerChrysler. Now that the company has split from the Germans and aligned itself with Fiat, the result has been, incredible as it may seem, a gigantic improvement. The old Grand Cherokee was as capable off-road as ever, but budget pressures robbed its once-luxurious cabin of premium materials, leaving it awash in hard, shiny plastics worthy of, well, Kias of the past.

    Today’s Grand Cherokee returns the premium materials to the cabin, while revving up the styling and installing the company’s efficient new Pentastar 3.6-liter V6 engine or the latest version of the powerful Hemi V8. For off-road enthusiasts it is a restoration of the Grand Cherokee to its deserved position as a premium off-road wagon.

Video: Priced out of the used car market?

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