In a tight market, big demand for used cars drives up prices
Shortage of inventory has dealers scrambling
By Jenn Abelson, Globe Staff | June 5, 2009
RAYNHAM – Drivers are snatching up an increasingly limited supply of used vehicles at some of the highest prices in years, even as auto dealers struggle to unload new cars.
Americans purchased nearly 4 million used cars in May, jumping 23 percent over the previous month, according to CNW Research. That comes as sales of new cars have plunged roughly 34 percent, despite sweetened incentives and cash-back offers. Meanwhile, the average transaction price for a used car hit $10,156 in April, the highest price since 2005, CNW Research reported this week.
Across the country, auto dealers are confronting a shortage of used cars and scrambling to increase trade-in incentives, scour online car listings, and engage in bidding wars at auction. The supply of used cars, particularly newer models, has dwindled recently because of a confluence of factors: consumers are not buying new autos and trading in old ones; the number of repossessions is waning; and rental companies, which usually provide a large inventory of used cars, are holding onto their vehicles longer.
“We have to travel farther, spend more time, and invest more resources to get these used cars,” said Adam Silverleib, vice president of Silko Honda in Raynham, where used car sales are up 15 percent this year. “It’s costing us 10 to 20 percent more to get used cars. And less than 5 percent of that is passed on to consumers because otherwise the used cars would wind up competing with the new cars. So we’re seeing less profit.”
Indeed, Silko Honda recently sent out a flier to customers advertising new cars, with the promotion: “Right now Silko Honda is actually selling new Hondas for less than used.”
The flier features a 2009 Honda Accord LX for $18,898 and lists the Kelley Blue Book value for the 2008 model (with 10,000 miles) as $22,095. A 2009 Honda Pilot EX is priced at $27,943 and the Kelley Blue Book value for the 2008 model (with 10,000 miles) is listed at $30,420. Silverleib said the intent of the mailing was not only to sell new cars, but to add to the used car inventory with the trade-ins people would make.
But those deals were not enough to lure Ray Milewski into a buying a new car. The 60-year-old retired three weeks ago from his job as a Florida real estate agent and moved to Massachusetts without a car. He showed up at Silko Honda on Wednesday and purchased a used vehicle – a 2007 Honda Accord with 31,000 miles for around $15,000. Silverleib said the price is about 10 percent higher compared to a similar transaction a year ago. He said a new car would have been around $23,225.
“I always bought new cars and ran them into the ground,” Milewski said. “But the depreciation of a new vehicle is huge. And now I’m retired and times are changing.”
The tight lending markets and recession have made used cars a more appealing option for some consumers. And the switch is even easier for drivers accustomed to new cars because dealerships like Silko are offering lifetime warranties.
Kelly Auto Group, which has about six dealerships, has offered customers more than Blue Book value to get trade-in vehicles and has bought more cars out of classified listings and off-lease vehicles to fill in the gaps, according to Lew Goldstein, director of operations.
“There wasn’t enough profit margin for these cars in the past,” Goldstein said. “But we’ve changed our standards.”
Goldstein said each dealership typically keeps about $1 million worth of used car inventory, but the supply is down between 15 and 20 percent.
There is also a pent-up demand for leasing used vehicles, according to John Sternal, a spokesman for LeaseTrader.com, a nationwide online marketplace for car lease transfers. The company, which reported an 11 percent increase in demand during the first three months of the year, expects to handle about 60,000 transactions in 2009, up from 45,000 transactions in 2008. It currently has a waiting list for customers looking to take over leases, but Sternal would not disclose specifics.
“People see the great financial benefits through taking over an existing lease. There is no down payment involved. And since you are picking up only what’s left on the lease contract, you’re not making a financial commitment for a long time,” Sternal said.
Tom Kontos, a car analyst with ADESA Auctions, which runs car auctions nationwide, said he expects the used auto market to get even tighter as rental agencies continue to tighten their inventory and the number of people coming off leases declines. Moreover, some owners of dealerships about to be closed by GM and Chrysler are planning to become independent used car dealerships, which would increase the competition for these vehicles and potentially push up prices even further.
Jenn Abelson can be reached at firstname.lastname@example.org.