Clunkers program could drive used car prices up

Hundreds of thousands of "clunkers" headed for scrappers may cause already rising prices for used cars to head even higher, dealers and market analysts warn.

The popular cash-for-clunkers program, extended by Congress last week with $2 billion more in federal incentives, requires that all the old fuel guzzlers traded in are scrapped — not resold. That means up to 750,000 vehicles will never find their way into the hands of another owner. Many are at the end of their useful lives, but others, with years of life left in them, normally would be resold.

"Those are the cars that lower-income families need," says Geoff Smartt, owner of Smartt Cars in Caldwell, Idaho.

Used car prices have risen about 5% on average in the last year, says Tom Webb, economist for Manheim Consulting, a branch of a major used car wholesale operation. Fewer new car sales have meant a drop in recent-model trade-ins. Car rental companies also have reduced supply by cutting their fleets. That's resulted in fewer castoffs for used car lots.

Now, the clunker program could cause prices to rise 5% to 10% more, especially for vehicles worth $4,500 or less, says Alec Gutierrez, senior market analyst for Kelley Blue Book. "It's going to drive prices up of some of the most affordable vehicles we have on the road."

The $2 billion added by Congress came after eager buyers churned through most of the original $1 billion in the first two weeks. The program provides incentives of up to $4,500 to people who trade in an old car for a new, fuel-efficient vehicle. But to prevent fraud, the program requires that all trade-ins be scrapped so the gas guzzler doesn't find its way back on the road.

Sen. Tom Coburn, R-Okla., called that provision "nuts" during debate in the Senate last week. He said that in his state, one trade-in had less than 10,000 miles on the odometer. "We're going to destroy the opportunity for somebody less fortunate to have that automobile," he said.

Used car dealers agree. They say fewer older cars are at auction.

Too few older cars at reasonable prices could put some dealers out of business, says Tim Swift, general manager of the Corry Auto Dealers Exchange, an auction operation for dealers in Corry, Pa.

"It's was tough finding them before, and now, it's even worse," says Mike Williams, owner of Auto Wise in Shelbyville, Ky. "The $3,000-to-$5,000 car is just gone."