KBB Forecasts Used Car Price Bubble

Used car prices will often fluctuate depending on the popularity of the vehicle as well as other factors including the price of gasoline. Indeed, in 2008 owners of compact cars saw their prices increase as gasoline topped four dollars a gallon. Getting 30 mpg on the highway is certainly advantageous when pump prices are high resulting in an increase in used car values.

Fewer Used Cars Available

Kelley Blue Book (KBB) is seeing another factor play in with the used car market and that factor is the federal government’s car scrappage program. Called “cash for clunkers” by consumers, the Car Allowance Rebate System (CARS) program has already removed about 250,000 used cars from the market, with an additional 500,000 slated for scrappage as the program is extended thanks to two billion dollars in additional funding.

KBB says that the clunkers program is removing used car inventory at a faster rate which means that dealers are stocking up on used car inventory while they can. This quest for used cars is pushing up prices, creating a bubble scenario.

“Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery,” said Alec Gutierrez, senior analyst of vehicle valuation for Kelley Blue Book. “As a result, dealers are going to auction to restock inventory, driving up used-car values. However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short-term, exacerbating the already-limited supply at auction. If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.”

Most Sought After Brands For New Car Buyers

KBB also found out in a recent survey that one in ten car shoppers have moved up their new car purchase thanks to CARS. The top brands being considered by people turning in their clunkers are Toyota, Ford, and Chevrolet.

The federal government’s program was supposed to end on November 1st or when funds ran out, but with only one billion dollars in initial funding, CARS was quickly overwhelmed by customers thanks to pent-up demand and huge deals on new cars.

See Also — Cash For Clunkers Doesn’t Go Far Enough