How to decide between new and used in a high-priced used-car market.

Everyone knows, it seems, that used cars are commanding high prices these days. Shrunken new-car sales reduced the supply of secondhand late-model vehicles. Basic economics tells us that shortage in supply translates to higher prices.

Used Car Prices: How High Is High?
Seldom asked is the follow-up question: How high is high? Should shoppers postpone their used-car searches until prices ease downward? Or, is the difference between current prices and those of the recent past not that enormous?

In a word, the used-car sky isn’t really falling. Not yet, anyway. Even if prices for vehicles that depreciate extremely slowly occasionally approach the cost of a brand-new equivalent, plenty of wiser choices may still be found.

At the National Automobile Dealers Association convention in February 2012, Jonathan Banks, executive automotive analyst for the NADA Used Car Guide, predicted that used car prices will continue to rise. Consumers “will benefit this year from higher trade-in values,” he said, “along with loosening credit.” Encouraging more trade-ins also helps to ease the short-supply problem.

Banks also reported that in 2011, average prices rose by 3 percent. He predicts that they’ll rise 1.8 percent this year, peaking in April and May. Compact cars will go up by 2.7 percent, he believes; midsize models by 2.1 percent. Large SUVs will increase by 1.4 percent. None of these increases qualify as drastic. So, if you’re ready for a “new” used car, why not accept these moderate price hikes? You might have a long wait until prices start sinking downward again.

Unusual Is Normal.
“What appears today to be abnormal pricing is, in fact, normal,” said Tom Webb, chief economist for Manheim, a major wholesale auction chain. Speaking at the National Remarketing Conference in Las Vegas, in November 2011, Webb added that compact-car prices peaked early in 2011 then started downward. Midsize cars have followed a similar pattern. Even so, Webb predicts, “vehicle prices in the next trough [low point] are going to be as high as they were in the previous peak.”

Unlike the situation for new cars, “used car sales have pretty much bounced back” to the 2006 level, said Tom Kontos, executive vice-president at ADESA Analytical Services. Furthermore, the price gap between compact cars and full-size trucks has narrowed. When fuel prices shot skyward a couple of years ago, a sudden flurry of interest in subcompact and compact cars sent their prices well past previous levels, while trucks sank to record lows. Not anymore.

Although the “new car has created a ceiling,” some used car prices have gone past the new-car figure, said AJ Schoonover, vehicle valuation manager for Kelley Blue Book. Even if the total price of the new model is higher, in some cases monthly payments for the equivalent used car are bigger. Typically, finance rates are higher for used cars.

Short Supply and Demand.
Toyota’s Prius has been a prime example. As summer 2011 approached, news reports told of people paying substantially more for a secondhand Prius than a new one would cost. Why? Because new Priuses were in short supply.

Edmunds.com began to post lists of used cars selling at near or above new-car price. Last October, Automotive News, the weekly trade paper, weighed in on the phenomenon. Used-car columnist Arlena Sawyers reported on a list released by NADAguides, which enumerated 107 used models in “clean retail” condition, priced from 1 to 39 percent higher than a comparable new vehicle. Topping the list was an entry-level Nissan Versa sedan, with a “clean retail” price of $13,875. At the time, the price of a brand-new Versa (including destination charge) was $10,740. Judging by those figures, the used Versa cost 29 percent more than an equivalent new one.

Logic-minded readers had to wonder: Who would be so foolish as to pay even a penny more for a used car than a comparable new one would cost, much less thousands of dollars extra. In the real world, the answer is: probably nobody, except for isolated cases of restricted-supply models.

New Vs. Used Car Buying Tips.
When deciding between new and used, we need to remember several factors:

1. The new-car figure must include all the costs involved in buying the car, including the destination charge.

2. New-car incentives have to be taken into account. As of late fall 2011, the average incentive on a new-vehicle purchase was $2,456, according to ADESA’s Kontos.

3. In any price guide, a “clean retail” figure is an asking price—what the dealer would like to get.

4. Certified pre-owned (CPO) vehicles cost more than “ordinary” used cars, which can send the used-car price toward—if not beyond—the new-car figure. For that reason, certification is a better bet for a car that’s at least two or three years old. Kelley Blue Book now lists specific values for certified cars, as opposed to regular used models. NADAguides will add similar values in spring 2012.

Supply shortages can actually work in the consumer’s favor. Manheim’s Webb suggests that a lot of dealers would prefer to retail a vehicle at a lower price than hoped for, rather than wholesale it at an auction. Careful, patient shopping can still unearth some reasonable possibilities. On the other hand, if you’re interested in a model known to be in short supply, investigate how its used-car price compares to that of a new one.