All used up: Pre-owned sales rise as consumers seek new-car alternatives

Used-car sales took a leap upward in April, and the trend is expected to continue at least until midyear as pent-up demand for affordable pre-owned vehicles jacks up at least one segment of the car marketplace.

Sales of new cars continued an unabated slide toward what analysts say is a 30-year low in the United States, but used-car sales showed strength as buyers unable to finance new cars shifted their sights to less expensive used models. As a result, retailers such as the large Penske Automotive Group reported that despite an overall decline in sales in the first three months of 2009, improving used-car sales kept them in the black.

Loosening credit for used vehicles, combined with the public perception that loans for new vehicles remain tight, has fueled a spike in used-car sales, said analyst Art Spinella of CNW Marketing Research. CNW, which tracks new- and used-car sales, projects that new-car sales will top out at 10.1 million this year, while used-car sales are expected to jump to 40 million, a 10 percent increase over a credit-crunched 2008.

Thanks to lower overall demand for cars, so far in 2009, bargain prices for used models also have lured buyers. Those bargains began to dry up in April as buyers returned to the pre-owned market and transaction prices increased, according to CNW's data. At the wholesale level, the market's move toward used vehicles has been pushing up prices each month since last October, though overall prices are still down from earlier in 2008.

Besides growing demand, used cars are now in tighter supply because of reduced trade-ins, a reduction that correlates closely in number with the drop in new-car sales. Trade-ins typically account for more than half of used-car inventories. Some of that lack of supply is expected to be offset by the prospect of 2.6 million vehicles coming off lease and flooding the market in 2009--up more than 8 percent from 2008.

What's next? Analysts say a strong used-car market could be a harbinger of improved new-car sales by midsummer, because as the used-car market tightens on growing demand, prices eventually will reach a level at which many buyers decide to step up to a new vehicle. If Internet trends are any indication, many of those buyers may be seeking domestic models, considering that Detroit Three vehicles made up the majority of the most-searched-for brands in April on the popular used-car Web site Autotrader.com.

Pressure on the late-model used-car market likely will abate once the so-called cash-for-guzzlers legislation becomes law. The federal measure is expected to pay up to $4,500 to consumers who give up their less efficient older vehicles and replace them with new vehicles with higher fuel economy. Experts say the net effect will be to drive down demand for late-model used cars, in much the same way that new-car incentives push buyers into new cars over similarly priced late-model used ones. Conversely, anyone looking for a good eight-to-10-year-old gas guzzler might want to get cracking before a million or so of those vehicles get sent to the crusher.

By Bob Gritzinger