Prices for used cars hit a record high

used_car_lot.top.jpg By Doron Levin, contributor


FORTUNE -- New or used? Burdened by a weak economy, U.S. carbuyers are choosing the latter option more and more, helping to drive used-car prices to a record high while holding back new-vehicle sales that are sputtering at roughly two-thirds of the pre-recession level.

Economists have a word for it: Substitution.

According to Karl Brauer, an analyst for automotive website Edmunds.com, those preferring used cars over new fall into two categories: buyers who are forced to economize and others who can afford new but decide to hold off because ``there's a bit of a stigma to spending."

Or, as Tom Webb, chief economist for Manheim Auto Auctions, put it: "It's cool to be frugal."

The average price of a used vehicle sold through October reached $18,570, compared to $17,968, a year earlier, said Edmunds.com. Edmunds, a website for shoppers, measures views of web pages devoted to new vehicles and compares with views of pages dedicated to used.

"Views for new [cars] were in the lead until 2008," Brauer said. "And then it switched to used."

As prices of used vehicles increase, the difference between new and used should narrow, attracting some buyers of used to switch to new. But lately manufacturers have squeezed new-vehicle discounts, causing new prices to rise as well. Thus, vehicle affordability may be difficult in both categories.

"There are fewer used vehicles available because manufacturers are selling less to fleets and therefore have fewer to recycle back to the market," said Deirdre Borrego, a vice president at J.D. Power & Associates. Almost 700,000 vehicles junked under the U.S. government's "cash for clunkers" subsidy program to stimulate new-car sales also cut into the supply of used vehicles.

Improvements in design, materials and manufacturing mean that today's vehicles can be operated safely longer than ever, albeit at the cost of continuous maintenance and repair. Borrego said that the average miles on a car traded in this year was 49,148 miles compared to about 46,000 miles last year. Average age of all cars on the road peaked last year at about seven years.

Analysts study new-versus-used ownership trends carefully for signs when new-car buyers might be returning to the market, an important indicator of how strongly the economy is rebounding. In the early part of the last decade, sales were running between 16 million and 17 million vehicles annually. This year sales are on track to finish at fewer than 12 million.

Dana Johnson, chief economist for Comerica Inc., said he expects vehicle sales of 13.3 million next year. "Interest rates remain low, and cars are pretty affordable, though not as much as they were" during the recession.

J.D. Power predicting sales of 12.9 million new vehicles next year, Borrego said. The biggest group of returning buyers, she said, are between the ages of 16 and 35 with lower credit scores "who were shut out of the market" when the U.S. economy was at its weakest.

The recent impressive profit reports from General Motors Corp. and Ford Motor Co. (F, Fortune 500) are a sign that strong pricing might be more critical to financial health than large unit sales. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Find Your Next Car
Company Price Change % Change
Bank of America Corp... 16.13 -0.26 -1.59%
Facebook Inc 59.72 0.63 1.07%
Yahoo! Inc 36.35 2.14 6.26%
Intel Corp 26.93 0.16 0.60%
Alcoa Inc 13.42 0.37 2.84%
Data as of 4:02pm ET
Index Last Change % Change
Dow 16,424.85 162.29 1.00%
Nasdaq 4,086.23 52.07 1.29%
S&P 500 1,862.31 19.33 1.05%
Treasuries 2.64 0.01 0.34%
Data as of 7:20pm ET
Sponsors

Sections

The company continues to struggle with convincing marketers to pay as much for mobile ads as they do for desktop ads. More

Observers are warning that risks of a blow up in China's property market are rising, threatening a slowdown that could hurt global growth. More

The company continues to struggle with convincing marketers to pay as much for mobile ads as they do for desktop ads. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Pamela Knighton, a 51-year-old social worker from Cuthbert, Ga. who earns less than $25,000 a year, had been really looking forward to her $4,300 tax refund last year. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.