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CNBC ON DIGG

Expect Used Car Prices to Stay High

Published: Tuesday, 13 Oct 2009 | 10:31 AM ET

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By: Phil LeBeau
CNBC Correspondent

used cars
Photo: Heather S. Logan
Tom Webb with the Manheim Auto Auctions has never seen a run like this. In all his years of tracking used car prices, he's never seen them surge like they have in the last nine months. In fact, the Manheim Index hit an all-time high in September. Adesa, which also tracks wholesale prices of used cars has seen a similar jump, although it saw prices peak in July. Both companies have seen prices soften a bit but if you are thinking they will pull back substantially, think again.

Used car prices have been moving higher the last two years dues to a series of factors including; falling supply of new cars, a dramatic drop in leasing (forcing many people to become buyers), and most recently the cash for clunkers program. The increases have been dramatic. According to Adesa, the average wholesale price for a vehicle was $9,742 last month. That's up 2.2% from September of last year.

So why are used car prices likely to stay high? Largely because the supply of used cars is likely to stay tight for some time. For example, the weak economy will force many people to hang onto their existing car or truck longer. People who would typically trade-in and buy a new car every 3-4 years are thinking twice and deciding they can drive their current car a little longer. With fewer cars being traded in, dealers will have fewer used cars on their lots. Also, after seeing auto sales fall off a cliff the last two years, there will be fewer cars and trucks rotating into used market in the next couple of years. On top of that, our cars and truck hold up better and for a longer period of time, so we don't feel the pressure to dump on old car and buy new.

All of this means we should get used to the idea used car prices staying high for some time. Tom Webb with Manheim thinks they may pull back 3-4%, but not much more. Certainly not re-assuring news for those who primarily shop the used market for their next car or truck, but a sign of just how tight the auto market is and will remain for the foreseeable future.