Higher Gas Prices Raising the Cost of Smaller, Fuel-Efficient Used Cars

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used carHigher gas prices are beginning to bite in new and unusual ways. Not only are prices going up at the pump, but they are being propelled upward for smaller, fuel efficient vehicles on used car lots nationwide. At the same time, there has been a spike in drivers trying to unload their gas guzzling SUVs.

Gas prices currently average $3.80 a gallon for unleaded regular, according to the AAA. That's up 37% since last October 1. According to most experts, the stampede out of SUVs really begins when gas crosses the crucial threshold of $4 a gallon, which it has already breached in New York, California and Florida.

"Gas prices are definitely starting to ripple in the used car market right now," says Bill Visnic, analyst and senior editor at Edmunds' autoobserver.com. Visnic notes that in addition to the gas situation, the shortage of parts in Japan because of the earthquake and tsunami have added to pressure on car prices. In addition, the fact that the economy is improving is sending all used car prices higher, not just for small cars.

But smaller cars are taking the biggest hit. According to Edmunds' proprietary measure of car prices, a three-year-old Honda Accord has soared in value by 24% since last September. A similarly aged Hyundai Sonata is up 22%, the Honda Civic is up 13% and the Nissan Sentra has risen 12%.

"Particularly the Civic and Sentra are the standard bearers in the fuel efficient category," Visnic says.

Higher gas prices also affect the ways consumers think about a car purchase. While they might have considered a new car previously, the higher prices at the pump mean they are thinking more about used cars, driving up demand for those vehicles. "I may now buy a used car because I have to spend more for gas," he says.

So why are all car prices headed upward? Visnic says the rebounding economy is having a strong effect in that there are just more people shopping.

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Interestingly, prices for used SUVs have not come down as much as small cars have gone up. That's because they tend to be a lagging indicator of consumer demand. People who already own SUVs can use online calculators such as the one at edmunds.com to figure out how long it will take to pay for the cost of trading in a larger car for a smaller one. For example, a driver may still have a $20,000 loan on an SUV but a dealer will only offer him or her $18,000. Then there's an extra $2,000-$4,000 for the newer smaller car. With higher gas prices, how many months of driving do you have to do to make that extra $4,000 for the smaller car worthwhile? It's a complex calculation and many people decide it's not worth the bother yet.

But that's not true of leased cars, which tend to be treated more like rentals than purchases.

According to John Sternal, vice president of leasetrader.com, which helps people transfer existing car leases to new owners, they are noticing a spike in listings for larger, fuel guzzling cars. But they haven't reached the panic stage that occurred in 2008, when there was a rapid runup in gas prices to a national average of $4.11 a gallon.

For example, Sternal says, the cash incentives that owners offer to induce people to take over their lease have increased from an average of $1,075 to $1,250 for SUVs and 6-cylinder or larger cars. Listing for these large cars have increased 5.3% since January. Search demand for large cars by potential owners has also fallen sharply.

On the other hand, cash incentives for Japanese economy cars have disappeared, down from an average of $450 in January. Listings for these cars have fallen from 19.1% of the total in January to 17.4% today - meaning that fewer people want to get out of their leases for small, fuel-efficient vehicles.

"We are seeing more and more people follow a similar trend to what we saw in 2008," Sternal says. "But $4 a gallon this time around feels much different than back in 2008: the jobs picture seems to be turning around and consumer confidence seems to be strengthening. If you're driving an SUV you're saying 'this stinks but I can weather this storm a little better than in 2008.'"

Sternal says the situation in Japan has had an immediate impact on people with leased cars because they saw retail showrooms cut their incentives after the earthquake because of anticipated shortages and they followed suit when it came to listing their leased vehicles.

"That makes it a little bit more of a seller's market," Sternal says. "The cash incentives dried up almost at the same time they did at the retail dealership level."
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