New- and used-car prices going up

Car keys on purchase agreement and license plate

New- and used-car prices are higher this summer.

How could that be?

We're in the middle of a recession that drove General Motors and Chrysler into bankruptcy and caused sales of new cars and trucks to plunge from about 17 million a year to fewer than 10 million.

Yet buyers are paying close to sticker price for many new models, and used-car prices are 9% higher than they were last summer.

For new cars and trucks, the problem is supply.

When the recession whacked sales, dealers dramatically reduced the number of cars and trucks they ordered, and car companies closed their assembly plants for weeks at a time.

On Sept. 1, there were 1.4 million new cars and trucks available for sale, according to Automotive News, half as many as on Sept. 1, 2008.

Then along came the "cash for clunkers" program in which the government paid up to $4,500 for older, fuel-thirsty vehicles that were traded in for newer, more fuel-efficient cars and trucks.

It was wildly successful. One Illinois dealer told us he was open until midnight every day just to keep up with the demand the clunker program created.

As a result, July was the best month for car sales this year -- only to be topped by August, as the clunker program continued.

That left most dealerships with acres of empty lots and no reason to dicker over the few models left in their depleted inventories.

You'll also find fewer, and less lucrative rebates, available as well.

Inventories are so low that Chrysler, which had a huge backlog of unsold cars and trucks this past winter, is actually reducing its rebates and cut-rate financing on several models.

Although Automotive News reports that automakers are ramping up production to replenish the supply, the extension of "cash for clunkers" into late August means they will be playing catch-up at least well into the fall.

The story is much the same for used cars.

Automotive News says used-car prices were 9% higher this June over June 2008.

Tom Webb, chief economist at Manheim Inc., which auctions used cars to dealerships across the country, says the dramatic decline in new-car sales means fewer trade-ins are finding their way into the system.

Rental car companies also are keeping vehicles longer, further reducing the number of low-mileage, late-model used cars and trucks that most used-car shoppers want.

"We've seen a double-digit decline in dealer consignments (at Manheim) and a double-digit decline in off-rentals," Webb says. "Rental-car agencies are buying a lot less: 1.1 million (new vehicles) this year versus 2.1 million in 2007."

"Cash for clunkers" was great for moving new cars but didn't help replenish the used-car market. The trade-ins had to be scrapped and were too old and worn to be prime used-car prospects, even if they could have been resold.

Dealers tell Automotive News that many consumers whose trade-ins didn't qualify for the government program still wound up buying a car -- but a used car instead of a new one, further reducing inventories.