Shortage of used cars sends prices skyward

If you're in the market for a used car, you may be in for a shock. The price of used cars has skyrocketed over the past year.

Auto dealers say the reason for the price hike is a nationwide shortage of quality used cars, and some dealers are having trouble finding cars to sell.

Heartland Auto Sales in Bemidji typically has a good selection of affordable used cars, but if you look around the lot lately, choices are fewer and prices are higher than a year ago.

Owner Davey Mills said it's especially hard to find cars in the mid-price range.

"Getting those cars in that $4,000-$7,000 range is tough," he said. "And we probably move more cars here in that price range than anybody, but it's hard to find them. That range of car has basically disappeared."

The used car shortage is happening across the country, according to AuctionNet, a data supplier for the auto industry. The shortage has pushed wholesale used car prices up every month last year, which has meant a steady rise in prices on Davey Mills' car lot.

Mills points to a 2005 Chevy Malibu Max as an example. It's a nice looking car with 60,000 miles. A year ago, Mills would have sold it for around $5,000. Today, the car is priced at nearly $8,000.

Mills said he thinks the recession forced people to hang onto their cars longer.

"I think it is the economy that's driving what's happening," Mills said. "I think people are tightening up their belts for sure and fixing what they have."

A few miles north of Bemidji, used car dealer Vern Voss has a different theory. He's had trouble finding cars to sell in the $1,000-$2,500 price range. Voss blames the federal government.

"They're hard to buy now, hard to buy good cars, because of Cash for Clunkers," he said. "That's the one that put everything down the tube. Took a lot of good cars off the lots, you know, cheaper cars."

Last fall's Cash for Clunkers program provided a cash incentive for people to trade in their gas guzzlers and buy a new car. The program removed nearly 700,000 used vehicles from the marketplace. Those old cars were destroyed.

But experts say the impact of Cash for Clunkers on the used car market was minimal. Paul Taylor, chief economist for the National Automobile Dealers Association, said most of the clunkers weren't worth much on the resale market.

Taylor says the shortage of used cars is most directly linked to the slump in new car sales. Last year about 10.4 million new vehicles were sold in the U.S., approximately 21 percent fewer than in 2008. Fewer new car sales means fewer trade-ins, Taylor said.

"There are approximately eight million cars that didn't come into the marketplace in 2008 and 2009," he said.

That's about four million fewer used vehicles a year that weren't available for resale.

On top of the slump in trade-ins, Taylor says many rental car companies have reduced their fleet sizes and are holding onto their cars longer. Again, that means fewer used rentals in the marketplace.

Auto repair shops are perhaps the biggest benefactor of the used car shortage and the slump in new car sales. Many repair shops report strong business these days. Bemidji mechanic Chris Hanevold says people are investing in what they have.

"They're saving money by not purchasing new cars, so we're seeing them fixing the old cars, putting a lot of money into their old cars," Hanevold said. "You can easily put a thousand-dollar repair bill on an old car, and you can get by for a year or two on that old car."

The auto industry should see some improvement this year. Experts predict a 15 percent upswing in new-vehicle sales in 2010. That will probably mean that more than a million additional trade-in vehicles will end up on used car lots compared to last year.

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