Why are used cars so expensive?

Used cars are displayed on a sales lot. As the economy continues to falter and Japan recovers from the earthquake and tsunami, demand and prices of used cars have risen 30 percent over the past year.

Tess Vigeland: Earlier this year, we did an entire show on car ownership. And when it came to the new versus used debate, Phil Reed of Edmunds.com made his case for "Team Used."

Phil Reed: If you wait one full year, you have one year's worth of depreciation and one year's worth of mileage. Not only that, but from there on in, that used car depreciates less than it did in that first year.

But fast forward a few months and the story has changed. The cost of used cars is at an all-time high. So Phil is back to explain. Good to see you again!

Phil Reed: It's good to be here Tess.

Vigeland: So if you remember, we were over at a car lot over in Santa Monica.

Reed: Sure.

Vigeland: It was a beautiful day.

Reed: Yes.

Vigeland: And we were talking the value of used cars. And the argument, essentially, was that a two-year-old car is the sweet spot and that's what folks should be aiming for.

Reed: Right.

Vigeland: But, boy, have things changed in the last four, five months?

Reed: It looks like fall is shaping up to be really a turning point.

Vigeland: So tell us what's happening here.

Reed: Well, used car prices have gone way up. Backing up a little bit, there was the earthquake in Japan and the tsunami. And as a result, not only were Japanese-manufactured cars severely impacted, but also many manufacturers that manufacture parts for American cars were too. The net effect was that the inventory on the lots were severely reduced...

Vigeland: For new cars.

Reed: For new cars, yeah. This put a lot of pressure on the used car market, because a lot of people turned to use cars. The prices of used cars began to really climb in a way that we had never seen them do before. And the line between new and used began to blur somewhat. There were times when we were really better off, economically speaking, to buy a new car than a used car, because some of the used cars were so high in value, had held their value well over the year or two since they had been put into the market.

Vigeland: How unusual is that? Have we seen this before -- aside from maybe the Prius and other used cars that have really held their value?

Reed: Sure, the entire market for used cars, almost all of the classes, particularly the lower, more economically based cars did hold their values quite well. And let's face it, the country is still in an economizing frame of mind. And that's definitely driven the prices up.

Vigeland: So does this basically mean that used cars are not as cost effective as buying a new car? Or is it really depends on what kind of car you're looking at?

Reed: The market is so broad that there's still bargains to be had out there. And a lot of the noise about the used car prices are the experts. It's the auctions, it's the...

Vigeland: You?

Reed: ...The used car salesmen. Well hopefully it's me too, because I did sell a used car this summer.

Vigeland: You did? You sold your Fit.

Reed: I sold my Honda Fit. I sold it for $11,500. The guy that bought it and sold it for an additional $500 a couple weeks later.

Vigeland: Whoa! You must've felt like a sucker.

Reed: You know, I like to think that I sell things at the right price. For me, the aggravation of an extra $500 wasn't worth it.

Vigeland: Yeah. So what does one do with this? If you've basically been taking the advice that we gave just a few months ago on our car show, which was really look for something that's two years old and you're gonna hit the sweet spot. Is that out the window?

Reed: Not entirely. I'm not gonna contradict my own expert advice. But two years old, you're probably pretty good. One year, you're in a position that it's so near-new that you're competing with the new car value. Now, it appears that the market is recovering. The inventories are climbing, the recovery from the earthquake is really a bit ahead of schedule. So what that means is that probably the used car prices are gonna come down a little bit.

Vigeland: A little bit. But you still may be looking at not a huge difference between the used car market and the new car market.

Reed: In some cases, it is going to be very close.

Vigeland: So still do all that comparison shopping that we talked about before, always.

Reed: I mean, whenever you're getting ready to buy something as big as an automobile, you definitely have to do the research. Because the market is fluctuating all of the time. And we have pricing guides like Edmunds.com. But you also have to look at the actual market, which would be used car classifieds. And again, these are asking prices, so when you actually get into the negotiation process, you have to keep that in mind.

Vigeland: Alright. Phil Reed is the senior consumer advice editor at Edmunds.com. Thanks for coming in.

Reed: Always a pleasure, thank you.

Vigeland: And Phil weighs in on pre-paid car maintenance on our Makin' Money blog.

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