Used cars swamp dealerships, may cause price deflation

Soaring new car sales are swamping dealers with trade-ins, leading to a glut of used cars that could deflate prices.

"I suspect all dealers will have the used car sale of a lifetime," says Jerry Reynolds of Prestige Ford in Garland, Texas. He launched his own promotions recently as his used car lot reached 410 vehicles, up from the normal 250.

Dealers took in loads of trade-ins from buyers flocking to take advantage of the no-haggle "employee pricing" discounts on 2005 models. The programs, in which buyers can get the same price offered to domestic automakers' employees, will continue until early September.

With so many used cars in stock, prices could drop as much as 5 percent from their recent peak after steadily increasing for more than a year, forecasts Paul Taylor, chief economist for the National Automobile Dealers Association.

Prices are already starting to descend in wholesale markets, down 1.2 percent from May to June, says Tom Webb, chief economist for Manheim, the nation's largest wholesale auto auction.

Dealers are geared up to slash their used car inventories. Jerry Seiner, who sells General Motors brands and imports at four locations in Utah, says he increased used car advertising at the end of June when his inventory doubled due to trade-ins.

As a result, Seiner sold 135 used cars last month compared with 71 in June — "probably our best used car month ever."

Automakers reported that new car sales in July were the most for any month in history, according to Autodata. About 1.8 million cars were sold, up 16.2 percent from the same month last year. Taylor says about 60 percent of new car buyers typically trade in their current vehicles.

Automakers see the possibility that used car sales could cut into new car sales, but are hoping the effect is minimized by a strong overall market for both. "It will wash itself out," predicts Paul Ballew, GM's director of global market and industry analysis, about the used car glut.

Buyers will see more recent-model used cars. The frenzied atmosphere of the employee-pricing deals has led more people to trade in even newer cars than usual, says Jack Nerad, editorial director for Kelley Blue Book.

Plus, dealers' new car inventories are depleted of the most popular models. "We're going to have big used car sales this month. We have to. We don't have anything else to sell," says Jack Fitzgerald, who owns dealerships in Maryland, Pennsylvania and Florida.