The U.S. government’s Car Allowance Rebate System (CARS), more commonly known as “cash for clunkers,” has ended effective today (August 24, 2009), we thought this was a good opportunity to discuss CARS’ impact on the used car prices and where the sector is headed going forward.

Effect of the program, so far.

• The program was a massive success in dramatically increasing light-vehicle sales. (Sales increased to 11.1 million vehicles. No prior month this year even reached 10 million in annualized sales).

• Lot of folks who would have otherwise continued to drive their clunkers, traded them in, for a new vehicle. The credit profiles of folks who traded in indicated high credit scores. (Normally frugal in nature).

• The ten most traded-in vehicles

1. Ford Explorer four-wheel drive

2. Ford F-150 Pickup two-wheel drive

3. Jeep Grand Cherokee four-wheel drive

4. Ford Explorer two-wheel drive

5. Dodge Caravan/Grand Caravan two-wheel drive

6. Jeep Cherokee four-wheel drive

7. Chevrolet Blazer four-wheel drive

8. Chevrolet C1500 pickup two-wheel drive

9. Ford F-150 pickup four-wheel drive

10. Ford Windstar front-wheel drive van

• The ten most purchased vehicles

1. Toyota Corolla

2. Honda Civic

3. Toyota Camry

4. Ford Focus front-wheel drive

5. Hyundai Elantra

6. Nissan Versa

7. Toyota Prius

8. Honda Accord

9. Honda Fit

10. Ford Escape front-wheel drive

Over 690,000 vehicles are off the used car market (headed to sheader instead).

Effect on used car market.

• Normally, incentives on new vehicles drive used vehicle prices down. According to Manheim Consulting chief economist Tom Webb, every $1,000 in new vehicle incentives decreases used vehicle prices by $750. However, new vehicle inventories were low even before CARS started on July 24, which has helped to support higher used vehicle prices.

• Furthermore, CARS has actually increased demand for used vehicles. Many consumers went to dealerships intending to participate in CARS but found out their trade-in was ineligible, so they decided to look for a used vehicle on the same dealer’s lot.

• Dealers are thus bidding up auction prices as they acquire more used vehicles to sell to customers who cannot trade in their clunkers. According to Manheim, the Manheim Used Vehicle Value Index for July was at its highest level since September 2007.

• The (bankers) confidence in dealerships is going up. There is now, even, talk of all the dealerships that lost the franchise in recent auto industry reorganization joining together to form a new auto chain. (which can only mean more demand on used car market).

Bottomline.

To start with, the supply of used vehicles was down with people driving cars longer than ever – thanks to the economy.

Lot of, otherwise, cheaper used vehicles (clunkers) which would have landed at the used car lot are now headed to metal graveyard.

The demand is either same or headed higher.

The profiles of folks who bought vehicles seems to show they are a large number of buy-and-drive-till-wheels-fall-off types, who are unlikely to trade-in at the end of model year.

We think the pressure on used car prices will be upward. Compared to the rock bottom (give away to get out of auto loan) prices a few months ago, we expect the prices on used vehicles to go up by about 35%.

One more good thing, the part suppliers seem to have received a boost in arm (with orders to supply new vehicles) and lot of them should survive the auto reorganization!

Right or wrong..Please let us know what you think. drop me a line at Sri at PreOwnedCar.com

Acknowledgment:- CNBC, Automotive News, MorningStar, Jalopnik, Wikimedia