New Car Dealers Scrambling for Used Vehicles

According to Paul Taylor, chief economist for the NADA (National Automotive Dealers Association), auto dealers are scrambling for used cars to replenish their inventories. Months of lagging new car and truck sales, combined with the requirement that used cars and trucks traded in through the CARS program be demolished, has left inventories of used cars severely depleted. Taylor estimates that dealers will bring in nearly 4 million fewer used cars and trucks this year.

Mike Stedem, who has dealerships in Florida and Louisiana says, “I haven’t had a problem getting used cars for a long time. Now it’s a problem getting anything. Even average vehicles are bringing stupid prices at auction.” By “stupid”, he means high. It is definitely a “seller’s market”.

Stedem says that in the early days of his dealerships he would search the local classified ads for reasonably priced for sale by owner vehicles to stock his lots. Although he hasn’t had to resort to scouring the classified pages in years, it’s an option he’s considering as his inventories of used cars and trucks grow thinner.

Also driving dealer’s interest in used vehicles in this post-Cash for Clunker period is the fact that used cars and trucks typically offer higher profit margins than new vehicles.

Bill Krouse, operating partner at Polar Chevrolet in White Bear Lake, Minnesota says, “I can make more on a $2,500 used car than a $25,000 new car.”

As supply has dwindled and demand has increased in recent months, used car profit margins have increased as well. According to the NADA, new car dealerships have seen net profits on used vehicles increase to an average of $214. That’s up from the average of $161 one year ago.

Used vehicle sales are expected to reach about 39 million this year compared with 36.5 million in 2008.

Since the summer of 2008, used vehicle prices have fallen and risen dramatically. Last fall, prices bottomed out but rebounded this year and continue their upward trend. ADESA Auctions says that average used car prices this past August were at $9,949, which is up nearly 4% from August 2008. In addition to relative supplies, demand for used vehicles was down in 2008 compared to now.

Traditionally, new vehicle sales are helped by increasing prices in the used car sector due to the higher equity shoppers have in their trade-ins. Since the end of the Cash for Clunkers program, however, fewer consumers are making those new vehicle purchases. Paul Taylor says, “There are fewer new car deals because of the economy.” He says that new car sales are at about 10.3 million units for 2009 despite the bump in sales created by the CARS program. He also says that other sources of used cars (former lease and rental fleet vehicles) have also shrunk by approximately 1 million units according to Taylor.

CNW Marketing Research estimates that 36.5 million used cars and trucks were sold by individuals and dealers in 2008, which was down from 41.4 million sold in 2007.

Sandy Springs Ford sales manager, Fred Blackwell, says he would rather restock his inventories with trade-ins than buy at auction and is offering higher trade-in values than in previous years. He says, “Everything is a function of the trade; that’s going to be where you live or die. You can’t go to the auction and pay retail, plus fees, plus transportation, plus reconditioning, plus advertising.”

In the current seller’s market, Blackwell says, the consumer has the upper hand and competition is fierce. He says he tries to make the deal quickly because if he doesn’t do it, his competition will. Blackwell says, if a potential trade-in customer comparison shops with a competitor, “The other dealer could just blow you out of the water because everybody needs used cars.”

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