Why Is There A Used Car Shortage?

by Don Elliott on July 27, 2011

Finding a car with a good used car value can be difficult, but lately finding just a used car has been more difficult! A perfect storm that went through the economy just three years ago has created a shortage of used cars, particularly late model and low mileage vehicles.

When the Wall Street money markets collapsed in September 2007, banks, finance companies, credit unions, and the manufacturer’s captive finance arms tightened up their credit policies. Credit challenged buyers were unable to get financing. As a result, the automotive finance default rate dropped to the lowest level in years. Low default rates caused fewer repossessed vehicles to enter the used car market.

For many years prior to 2008, there were 16-17 million new cars and light-duty trucks introduced into the market each year. Production fell by almost half in 2008, dropping to just 9 million. In 2011, the auto industry anticipates reaching only 12.5 million vehicles. Fewer new cars means there will be less used cars at some point.

Many high quality one and two year old used cars were available from the car rental segment. GM, Ford, Chrysler, and Toyota were the largest providers of new cars in the rental repurchase program. Auto manufacturers sold cars to the rental companies at favorable rates and bought them back in about 12 months with 20-25,000 miles. They were sold at wholesale car auctions to franchised car dealers, providing nearly new used car alternatives to a new car purchase. Both Chrysler and GM filed for bankruptcy, virtually eliminating their car rental repurchase programs. Toyota underwent a devastating car recall problem that severely disrupted their flow of cars to the car rental industry. As a result, cars were kept in service longer. Turn over of rental cars was cut in half, reducing the number of cars in the car rental service from two million units to less than one million units in 2009. The auto industry has recovered somewhat with 1.2 million units turned over in 2010.

Shortages make used car shopping a bit more challenging. Good deals can be found in unexpected places. For example, many new car dealers are holding on to their new car trades. Instead of sending off-brand, older cars and trucks to auto auction, they are cleaning them up for resale. Check the back line for the best used car values.

Another good place to look is at smaller used car dealers and auto repair shops. Both are very close to the private seller market. Occasionally, a car owner will give up his car to an auto repair shop when they are unable to pay the bill.

It doesn’t appear that the used car shortage will let up soon. It will be at least a year until supply catches up with demand. On a positive note, used car prices are leveling out and financing resources are more readily available.

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