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American Used Car Market Plunges into Crisis -- and Opportunity

Used cars: seedy realm of shifty men in plaid sportcoats.. or the business you want to be in if you're selling automobiles? At the moment, it's definitely the latter, because a combination of economic factors is creating a classic supply crunch and driving up used car prices as demand briskly recovers.

Here's what happened. The financial crisis hammered the U.S. auto market down to barely 10 million new vehicles sold annually in 2009. At its height in 2005, the market was at 17 million. All those cars and trucks that weren't sold two years ago are now not being resold as used cars. But people who have delayed buying any car, new or used, are coming off the sidelines. There's ample demand, but limited supply.

Used cars are aren't such a great deal right now
What makes a used car a smart purchase most of the time? It's already absorbed the substantial depreciation that a new car experiences -- but given how reliable cars are these days, if it's only a few years old, it's practically as good as new.

But all that pent-up demand from the past two years is skittish about new cars. People who've seen their net worth trimmed, slashed, or obliterated are exceptionally cost-conscious. Trouble is, their thrifty instincts are colliding with a supply of used cars that can't satisfy the demand.

Is this the right time to buy new?
Consequently, many used cars of relatively late vintage are commanding prices close to new models. Here's an example from the St. Louis Post-Dispatch:

A new Toyota Prius these days starts at about $22,000, which might prompt cost-conscious buyers in this fragile economy to scout around for a used version.

But even a two-year-old model of the hybrid fuel miser costs almost as much, about $20,800, according to National Automobile Dealers Association.

And don't expect dealers to come down much on the price of either one.

So why bother with the used Prius? That difference of $1,200 isn't trivial, but at the very least a buyer would have to take into account the two years of battery depletion that the used Prius has suffered and figure that the new hybrid is a better deal.

Springtime for car dealers -- and car owners
Car dealers love used cars, especially lightly used models that they themselves sold or leased. They can sell these as certified pre-owned vehicles, basically the highest level of used car, and book substantial profits.

But any used car of recent vintage works for a name-brand dealers, which in a tight market like this means that dealers are able to maximize their moneymaking. Of course, anyone who was able to buy a vehicle in the past few years is also in the driver's seat. Dealers want to purchase their cars to feed the surging demand for used, paying top dollar for popular models in the process.

Enter... trouble in Japan
This supply-demand imbalance should work itself out as more new cars are sold and leased. Except that the Japan earthquake has clobbered the global supply chain, setting Japanese automakers back by months and disrupting the production of Western car companies.

So this used car crisis could persist through the summer and even beyond. And if you took advantage of the Cash for Clunkers program in 2009, and if you're thinking about trading in your almost-new, government subsidized purchase for a price very close to what you paid for it... well, this crisis could be an opportunity.

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Photo: Wikimedia Commons
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