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Used car prices are falling for the first time since 2008

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Why used car prices are falling

Used car prices look set to suffer their first meaningful decline since 2008. And the likely culprit is the strong number of new vehicle sales.

According to "NADA Used Car Guide," used car prices will fall 5 to 6 percent this year. And while some may be tempted to draw from that negative conclusions about the U.S. economy, NADA executive analyst Jonathan Banks explains that the drop is reflective of rising supply, rather than falling demand.

"2016 marks the first year where we have a material increase in used supply," Banks said Friday on CNBC's "Trading Nation."

He explains that recently, record-high used car prices have been spurred by a lack of used car supply, which in turn was caused by low new vehicle sales as a result of the recession. That trend is now reversing.

The supply of used cars "is driven by 2013 lease returns coming back into the market, which represents about an 800,000 increase compared to 2015," Banks said.

In that way, the drop in used car prices is "a byproduct of the strong new vehicle sale success we've been having."

So will used car prices continue to drop, as cars that were leased when new continue to come back onto the market?

It's possible, says Banks, adding that "one of the wildcards is the new vehicle incentives."

There is "more risk" of lower prices "if there's a continuation of the incentives that are stoking new vehicle sales," he said.


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