Why a used Civic still costs $16,118

By The Wall Street Journal

The appeal of fuel efficiency is moving beyond the new-car market and creating a run on small used cars.

Used economy cars that once could be difficult for dealers to move -- the Ford Focus and Chevrolet Aveo, for instance -- are now flying off lots, and prices are rising.

In May and June, the 10 used cars with the fastest-rising prices, according to J.D. Power & Associates, included the Hyundai Elantra, up almost 9% from the year-earlier period, and the Kia Spectra, up nearly 8%. A few years ago, the list was dominated by larger, more luxurious cars like the Lexus LS Series.

Some used cars' prices are even approaching the levels of new models. The average 2006 Honda Civic costs $16,118, or 86% of what a new 2008 model costs. The average price of a used 2006 BMW Mini Cooper is about 81% of what a new model costs. And the long-sought-after Toyota Prius costs 87% of the new-model price.

Sustained high gasoline prices are pushing more drivers out of their gas-guzzling SUVs and into what were once called "econoboxes." But because economy models haven't been big sellers for the past few years, carmakers have built relatively few of them. The resulting tight supply and strong demand have driven up prices.

The average price of a used subcompact car (such as the Honda Fit) is up 6.9% this year to $10,417 from $9,742 a year ago. The average price for all used vehicles has fallen 2.7%, dragged down by falling prices for big vehicles, as well as the fact that more low-price cars are in the mix. Prices for large, used SUVs and pickups are down 10% to 12%, according to J.D. Power & Associates.

Brian Benstock, a Honda dealer in the Queens borough of New York City, says that dealers have to pay more than they used to at used-car auctions for certain models, like the compact Civic.

Civics are selling at auction for more than $3,000 over the "book price" dealers are more accustomed to paying. SUVs are selling at prices "substantially under book price," he adds. Even large dealers are having a hard time finding enough used Civics and other models to satisfy demand.

Another change: Some of the so-called certified used-car programs run by manufacturers, which used to be associated with luxury cars, now focus more on small cars.

"Our certified-used sales are up 40% over last year," Benstock says, noting the growth has been driven largely by customers seeking higher fuel economy.

Fuel economy "meant everything" to Joseph Carullo Jr., a New York City manufacturer of clothing accessories, who last month bought a 2005 Civic for his daughter. "We were looking for something that would get better than 30 miles per gallon," he says.

"We find that the big ticket is 30 mpg," says Norm Olson, sales operations manager for Toyota's certified-used-car business.

He says the company's Corolla compact and Camry midsize sedans with four-cylinder engines are among its most popular used cars. Buyers are interested "in just about anything with four cylinders" because those are the cars that will travel more than 30 miles per gallon, Olson says.

For car shoppers, the run on econoboxes has a downside: Consumers have to pay top dollar for small used cars, even as they get lower trade-in values for their large vehicles. Some buyers may also be deterred by the higher upkeep costs of older cars.

But the fuel savings are substantial. For instance, if you switch to a vehicle that gets 20 mpg from one that gets 15 mpg, and drive 15,000 miles a year, you'll save about $1,000 a year at $4 a gallon. As for upkeep of an aging car, the average amount spent on a car in the fourth year of its life, according to J.D. Power & Associates, is $398.

Benstock says booming prices for small used cars reflect a degree of hysteria typical of markets where demand outstrips supply. But eventually, he says, "at some price, buyers are going to say no."

"This market is always cyclical," says Dan Crowe, manager of Honda's certified used-car business. He adds that relative prices for used compact cars are likely to decrease as pent-up demand eases.

"Right now, though, we're in the right place with the right product," he says.

This article was reported and written by Jonathan Welsh for The Wall Street Journal.