High Trade-In Value Good for New-Car Shoppers, Not Used


New cars are getting more affordable, we learned earlier this week. Now a Cars.com analysis, along with information from the National Automobile Dealers Association, has found that trade-ins are commanding higher prices as well. That’s a double whammy for new-car shoppers looking to buy now. However, it won’t be appreciated by first-time used-car shoppers with no trade-in as a down payment.

NADA expects a 4% drop in used-car vehicle supplies throughout 2011, leading to a 5% to 10% price increase in used-car auctions, which are one of the primary methods for car dealerships to acquire used vehicles. Gary Johnson, sales manager at Jimmy Gray Chevrolet in Memphis, Tenn., said he’s paying about 10% more right now for used cars at his store compared with a year ago. “Normally, in the wintertime [used cars] get a little bit cheaper, but that’s not the case right now,” he said.

When dealers can’t get their vehicles at auction, they look elsewhere. “If we can’t get the cars we want through auction, we try to buy them through individuals [or other dealerships], but neither typically wants to give up their cars at wholesale prices,” Johnson said.

Overall, the increased demand for trade-ins has been a net positive for car owners with 2- to 5-year-old vehicles. According to NADA, the demand for trade-ins will help improve new-car sales in 2011 as well.

If you’re looking for a car without a trade-in, this probably comes as bad news. The average transaction price for a used car on Cars.com in January was $17,848, about 3% more than the same month last year and a whopping 13.4% higher from prices in 2009.

A lot of the price increases are due to pent-up demand. During the recession, some car shoppers held onto their old jalopies, increasing the average age of the entire population of cars in the U.S. over the past 10 years. Now many car owners are forced to get something newer, out of necessity. Combine that with an increase in the flow of credit and rising consumer confidence, and all of a sudden people are more able and willing to replace their old vehicles.

The impact on prices has been most acute at GM and Chrysler, which have seen residual value gains of 15% to 20% for 2- to 5-year-old models, according to NADA. Used Japanese, German and Korean brands have seen 10% price increases.

According to the Cars.com’s internal research, used-car vehicle prices tend to ebb upward toward the middle of the year, with decreases at the beginning and end. So don’t expect prices to go down anytime soon.

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