Economics 101: Used Car Supply Down, Prices Increase as Demand Goes Up

Automobile Staff
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#Acura, #MDX

In the wake of the federal government's Cash for Clunkers program, and with the unemployment rate high across the country, demand for used cars is outpacing supply, causing prices to skyrocket.

Last year, the government took almost 700,000 vehicles out of service with Cash for Clunkers, decreasing the available supply of used vehicles. High unemployment rates and a rather bleak market have caused consumers to shy away from financing a more expensive new car, and turned them toward used cars. This combination has cause used car prices to rise to the highest level in at least seven years, according to Edmunds.

"People are hesitant in making big-ticket purchases, that's why we're seeing a drop-off in new vehicle sales," Alex Gutierrez, Kelley Blue Book's lead vehicle valuation analyst, told The Detroit News. "But just because you're hesitant [to buy a new vehicle] doesn't mean you don't need to buy a vehicle."

Another reason for the decrease in vehicle supply is that when the auto industry collapsed in 2008 and 2009, automakers all but abandoned leasing. This helped to create a used-vehicle shortage, as leased vehicles are typically turned around and sold. Dealerships also take trade-in vehicles to sell, but with many financiers not recognizing higher vehicle resale values, some consumers are choosing not to trade the vehicle in for a new one.

Used-car segments seeing the greatest increase in used vehicles prices are, unsurprisingly, the SUVs and luxury vehicles that commanded high initial prices. Large SUVs such as the Acura MDX, BMW X5, Cadillac Escalade, and Chevrolet Suburban saw used-vehicle prices rise by close to 30 percent. Used compact SUV prices have increased just over 14 percent, and used luxury vehicle prices are up 16 percent. Used midsize sedans, however, only saw a 2.3 percent increase in transaction price.

On average, used car prices are up 10.3 percent over July 2009. The average transaction price of a used vehicle right now is around $19,248, or the price of a loaded Ford Fiesta.

If you were in the market for a vehicle right now, what would you rather have? A smaller, inexpensive new car, or something you could find used for 19 large?

Source: The Detroit News

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