Prices for small used cars are climbing to unexpected levels, a sign that demand is growing as price-sensitive consumers face dwindling new-car options.
Small used-car prices in the second quarter rose across the board, at retail and wholesale. While some analysts point to seasonal shifts as reason for the uptick, the development also follows moves by some major automakers to curb production of small cars.
The price hikes are creating headaches for dealers trying to maintain inventory of affordable used vehicles for customers even as the demand means it's easier for dealerships to sell the small used cars on their lots.
"The vehicles that retail under $15,000, and especially those you can retail under $12,000 — there's not enough of them," said Brandon Caldwell, retail operations manager at Friendship Ford in Bristol, Tenn., which sells 80 to 100 used vehicles per month. "Dealers know that, so when you go to the auction to buy these cars, dealers are paying much more than they were a year ago because of the demand."
Retail prices for 3-year-old compact cars at franchised dealerships have reached unexpected highs, with the average transaction price rising 3.9 percent in the first quarter to $13,464, according to Edmunds' latest used-car report. Overall, prices for all used vehicles regardless of age rose 2.2 percent to a record $19,657, Edmunds said. Meanwhile, at Manheim's wholesale auctions, compact car pricing rose 5.7 percent in May, stronger than for pickups and SUVs. Analysts say the price increase is notable.
"Those sedans, those coupes, all of those segments were really pounded by low gas prices," Edmunds senior analyst Ivan Drury told Automotive News. "It's been years since we've seen anybody look at used sedans as worth something."
The price hike in small used cars was no surprise to Zohaib Rahim, manager of economics and industry insights for Cox Automotive. Off-lease models from 2016 and off-rental units from 2017 are rebalancing the used market share of small cars, he said.
"You're in a part of the market where compact car pricing is stronger than the overall industry when just six months ago it was the opposite," Rahim said. "The level was surprising, but we did expect this to happen."
That said, the market share of used cars slid to 49 percent in 2018's first half from 51 percent in December, according to Manheim, a trend Rahim expects to continue through the year as more off-lease and off-rental units come back favoring light trucks.