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Used-Car Market May Be Revving Up

29 October 2014 in Trading Ideas

It turns out the best deal on that shiny new car may be on one that isn’t so shiny.

As a CBSNews.com article pointed out earlier this month, used cars may be the best opportunity for a bargain that consumers have seen for years.1

According to information from wholesale auction firm Manheim that was cited in the story, US used-car prices fell five straight months through September after a long period of rising through the spring.

That includes a 2% decline in the third quarter compared with a year earlier. “The last quarter of 2014 will be a great time to get a good deal on a used car,”

AutoTrader.com senior analyst Michelle Krebs told CBSNews.com.

The lower prices are due to healthier new-car sales as the economy has recovered.

With auto sales and leases slumping amid the recession in 2008 and 2009, fewer trade-ins and lease returns were available in recent years. Now, motorists who took out a typical three-year lease in 2011 are turning in those cars, boosting used-car inventory and driving down prices.

“During the recession it almost cost as much to get a used car as a new car, but now the market is going back to historical norms,” said Larry Dominique, president of research firm ALG, which sets future used-car values for leases. That resulted in a trade-off between used cars and new cars because manufacturers and dealers were discounting new-car prices and offering low interest rate deals.

Meanwhile, recent-model used versions of the same car were selling at high prices with higher interest rates on loans.

Now, used-car inventory has risen for the past three straight months — a report by the Detroit News said it was up 1.5% in September compared to the same month a year ago. About 9.76 million used cars were available in the US in September, compared to about 9.62 million last September.2

The number of certified pre-owned vehicles — those inspected and deemed worthy to resell by manufacturers — are on the rise, too, according to the report.

AutoTrader.com said the supply of those has increased 6% in the past six months.

The rosier picture for used-car sales may also be translating to the stocks poised to benefit from a boost in used-car sales. The Used-Car Tune-up motif has gained 7.1% in the past month. In that same time, the S&P 500 is down 0.7%.

In 2014, the motif is up 10.4%; the S&P 500 has increased 7.9%.

While CBSNews.com said that analysts predict supply levels are still years away from pre-recession numbers, they say the used-car market should continue to rebound through the remainder of the year and into 2015.

That could mean the road is just beginning for revived used-car sales – and an opportunity for investors to get their portfolios into gear.

1Jerry Edgerton, “Used cars are a good deal again,” cbsnews.com, Oct. 17, 2014, http://www.cbsnews.com/news/why-used-cars-are-a-good-deal-again/, (accessed Oct. 27, 2014).

2Michael Martinez, “Used-car prices fall as ending leases fill dealer lots,” detroitnews.com, Oct. 6, 2014, http://www.detroitnews.com/story/business/autos/2014/10/06/used-car-market-heats/16840109/, (accessed Oct. 27, 2014).