Why Used Cars Are Outselling New Vehicles

Kathy Roberts, a paralegal from Plymouth, Mich., was skeptical of a recent postcard she received from her local car dealer. It offered to put her in a new vehicle for $26,000, the same price she paid for her one-year-old Dodge Journey that she'd already driven 14,000 miles. Despite her doubts, Roberts's husband called the dealer and was told that they would offer her a brand new version of the same model, in the same color, with only 29 miles—all for the same monthly payment. With incentives and rebates, she actually came out $700 ahead. "I was thrilled. A new car without any more money!"

Customers like Roberts are finding that their high-quality used cars are a coveted and rare commodity these days. While GM and Chrysler hit the federal government up for bailout money and new car sales have been notoriously slow in the last few months, the demand for used vehicles is up. According to Auto Data Corp., sales of certified pre-owned cars in January 2009 were up 10 percent from the same time last year. The average consumer trades in a vehicle after two or three years, providing steady supply of low-mileage used cars. But as household budgets and credit remain tight, drivers are hanging onto their cars longer and returning them to dealers when they're essentially junk.

That's why Roberts's dealer, Michael Schwab of Dick Scott Dodge in Plymouth, Mich., is sending out those cards—to give car owners more incentives to get their high-quality vehicles back into dealer showrooms. The mailing effort has brought "a lot of success" from buyers eager to get a new car for the price of a used one, he said. It also helps move new cars, as buyers trade up when they bring in those used cars.

Dick Scott isn't the only dealership to employ that trade-in tactic. Adam Simms, general manager of Toyota Sunnyvale in Sunnyvale, Calif., has had up to three members of his staff focused exclusively on calling owners of high-quality used cars, often visiting them at their home or office. "We got 15 to 30 cars a month in that way," he said. Norm Olson, sales operations manager for Toyota Certified Used Vehicles, said dealers go to great lengths, contacting sellers from Web sites like craigslist and AutoTrader.com, even visiting them at home and writing them a check on the spot for their car. Once the cars get to the lot, they don't stay there long, often selling within two weeks, Olson said. While new car sales for Toyota fell 50,000 from last year, it saw its best-ever January for certified used vehicles, up 4,000 from last January.

Mike Jackson, director of North American Vehicle Forecasts for CSM Worldwide in Northville, Mich., said economic uncertainty has "caused a flight to quality," with consumers looking to purchase reliable, slightly used cars instead of new. That situation will undoubtedly lead to hikes in the prices of premium used cars, at least in the near term. They'll "pay a little more for a fair vehicle when they expected to pay more for a higher quality vehicle," said Jon Linkov, managing editor of autos for Consumer Reports.

Geoff Pohanka, president of Pohanka Automotive Group in Marlow Heights, Md., says dealers are paying as much as $2,000 more for used cars at the wholesale level, an increase that undoubtedly will be passed onto consumers. In his dealership, he saw a 20 percent increase in used car sales between Christmas and mid-January.

Steve Jardine, vice president of Johnstons Toyota in New Hampton, N.Y., is offering to pay over book value for used cars. And the growing demand is reflected in his price, too. A Toyota 2006 4Runner SUV that sold for $14,000 last November is now going for $19,000, he said. If that sounds like a lot, he notes that it's still well under the $30,000 price for a comparable new 4Runner. And, as auto companies curb production, new cars will be even harder to come by in the spring. With fewer new cars to sell, the market for premium used cars "will go even higher" within the next six months, he said.

And others, like Kathy Roberts, who have high-quality used cars to trade, will continue to benefit from this situation. "Sometimes," she said, "things really are what they seem."