Tight supplies boost used-car prices

Weak new-car sales and leasing activity at the depths of the recession are felt today in smaller inventories of two- and three-year-old used cars on dealers' lots.

And that in turn is resulting in strong pricing.

The old adage of new cars losing 30 percent of their value the moment they are driven off a dealership's lot?

It simply doesn't hold true anymore, says Tim Hohl, general manager of Michael Hohl Motor Company in Carson City.

The relatively small pool of cars coming off three-year leases or traded in by buyers who made purchases in 2009 and 2010 is one reason.

And auto manufacturers, remembering the financial battering they took early in the recession, tightened the reins on new-car production. With fewer new cars on dealers' lots, buyers are taking a closer look at used vehicles when they can find them.

"We have seen a marked difference in used car prices as to what would have expected," Hohl says. "Newer-model used cars are bringing more money than they ever have in the past relative to new car prices. Used cars are as valuable as they ever have been."

Eric Mares, a vehicle locator with Consumers Fleet and Sales in South Meadows, typically buys vehicles for customers at auction. Auction buying in the past few years has become much more difficult, Mares says, because of the rising cost of vehicles.

"It's not that you can't still find good quality cars, but you have to pay Kelly Blue Book value or more," he says.

And that's tough for a dealer who then needs to add $500 or $1,000 to the price tag to cover detailing, smog certificates, overhead and profit.

"By that time you have to price it over Kelly Blue Book retail for a starting point. Since there is so much information out there you look ridiculous to the public because they have done their homework. We just don't have the margins anymore," Mares says.

Lee Bosch, owner of Bosch Motors in Winnemucca, which shifted its business model to selling used cars after General Motors restructured in 2009, agrees that auction prices are squeezing dealers.

Locating heavy-duty three-quarter or one-ton pickups that one to four years old is difficult, Bosch says. When they do come up at auction, they usually sell for more than wholesale prices.

"I have no idea how they resell it," Bosch says. "It is crazy. In a lot of cases I tell clients to get brand new. Trying to find one- or two-year old used truck is just impossible."

Ben Scott, owner of Scott Motors, also shifted focus in recent years to used car sales after losing a franchise for Cadillac and Buick lines in 2009. (Scott Motors still has a new-car franchise for the Land Rover line.)

Scott says prices paid for used cars often make him wince because those prices must be passed on to consumers.

Recently, Scott says, there is a narrowing gap between the cost of new and used vehicles, which ultimately could curtail sales of used vehicles.

Generally, used cars have a higher profit margin for dealers, while profit margin for new cars largely is determined by the manufacturers, Scott says.

"You have to maintain that differential between new and used, and it squeezes the whole thing," Scott says. "It squeezed the dealerships' potential for profit."

Smaller profit margins means dealerships are more focused on sales volume than margins on individual transactions, Hohl adds.

Despite higher prices dealers are paying for use vehicles, auto sales have been brisk the first two quarters of the year.

All four product lines from General Motors had their best June sales figures since 2007, Hohl says.

Michael Hohl Motor Company typically relies on trade-ins for much of its inventory of used vehicles, but like most dealerships it also purchases used cars from auctions and online retailers.

"For the most part people are having to pay more for a car than they would have before the recession really started to hit," Hohl says. "But by extension we are giving more money for trades than we ever have before. People still are going to buy the same car, they just have to realize they will have to pay more for some of these used cars.