Why Used Car Bargains Are Getting Harder to Find

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Used cars for saleThinking about buying a used car? You might want to think about doing it sooner rather than later.

According to new data from the National Automotive Dealers Association, which tracks the market closely, prices are on track to rise an average of 1.8% in 2012. The cost of a used compact car will go up even more -- nearly 3%. And prices will near their peak in April and May, says the association.

What's going on? And what does it mean for car shoppers?

A Market Under Pressure From Both Sides

This is a trend that has been going on for awhile. A recent Wall Street Journal report noted that the price of an average midsized used car less than five years old has risen nearly 15% over the last two years.

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What's happening is that both sides of the supply and-demand equation are getting squeezed. On the demand side are consumers who, since the economic crisis in 2008, have been looking for ways to save money. Instead of buying new cars, they've been choosing to purchase nice used vehicles.

On the supply side, new-car sales have been down during the same period -- way down. More than 16 million cars and light trucks were sold in the U.S. in 2007. Last year's total was just 12.8 million, and even that was a big increase over levels seen in prior years.

The result: Supplies of lightly used cars have run short while demand has been high. Some models have become quite scarce, particularly fuel-economy stars like Toyota's (TM) Prius and the Honda (HMC) Fit. To get one, you've got to be willing to pay top dollar.

Good Strategies for Concerned Car Shoppers

Yes, the market is tight, and higher used-car prices are likely to be with us for a while. But don't slam the brakes on your plans to buy a used car just yet. You can still get a lot of car for your money if you employ a few smart shopping strategies.
  • Steer clear of Toyotas and Hondas for now. Sure, they're steady, dependable choices. But key models are in especially short supply because of the struggles both automakers had in the wake of last year's tsunami in Japan. That means prices will be extra-high -- but improved reliability across the industry means that there are plenty of other good options to choose from nowadays.
  • Consider buying American. General Motors (GM) and Ford (F) both got tarred with a bad quality rep after decades of sub-par products. That means that their cars still tend to depreciate faster than imports, even though both companies have made huge improvements in recent years. This is especially true of Ford, whose more recent products -- cars like the Fusion and Mustang -- are among the best used-car buys out there right now.
  • Consider buying new. Buying new gives you more choices, a better warranty, and some peace of mind -- you don't have to worry about hidden damage or other lurking problems. You will pay more for a new car, but the white-hot used-car market means that you'll get more for your trade-in -- and you'll lose less to depreciation in the first year.
Whatever you decide, remember to shop for used cars the right way: Start by choosing a model, then shop for the best example available. And unless you're buying a car that has been "certified" by a factory program, make sure to have a mechanic check it out before you buy, especially if you're buying long-distance.

At the time of publication, Motley Fool contributor John Rosevear owned shares of General Motors and Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford, as well as creating a synthetic long position in Ford.

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