The used-car market, cruising along for most of 2009, hit a pothole this month, causing a quick drop in demand and prices, according to a new study.

“It’s a pothole, but big enough to blow a tire,” says Pat Ryan Jr., CEO of FirstLook, a Chicago firm that tracks and analyzes used-car data and provides inventory-management software systems to dealers.

The results of the setback are less demand at the retail and wholesale levels, a dramatic 27% increase in aging dealership inventory (vehicles in stock 60 days and longer) and a $1,000-per-vehicle drop in average wholesale prices in October compared with the month before.

“Our projection is the wholesale market will continue to be soft for the rest of 2009,” Ryan tells Ward’s.

The used-car “bull market” lasted until mid-September and got a boost from the federal government’s “Cash for Clunkers” program. That incentive effort was intended to spur new-car sales. But it helped used-car sales, too.

“It increased showroom traffic, and many people ended up buying pre-owned vehicles because of trade-in issues or because they didn’t qualify for Clunkers but still wanted a car, so they bought a used one,” Ryan says.

The crack in the used-car market came after the end of Clunkers, which “appears to have pulled all sorts of demand forward,” he says.

When pre-owned retail sales slowed, dealers curtailed their wholesale purchases.

“Dealers got what’s called ‘alligator arms’ at auctions,” Ryan says. Industry sources indicate auction no-sale rates dramatically increased.

“The wholesale used-car market is in the midst of a post-Clunker hangover,” he says. “The last 30 days have seen a dramatic decrease in pre-owned retail sales amidst a softening of wholesale values, while aging inventory has climbed to an alarming level.”

A 14% drop in used-vehicle sales in September was the biggest year-over-year monthly decline for 2009, says Tom Webb, chief economist for Manheim Consulting, a branch of a major auto-auction firm.

It was evidence that a post-Clunker market slowdown “was widespread, impacting both new- and used-vehicle sales,” he says in an index report.

The aged inventory overhang is likely to further soften the wholesale market, Ryan says.

The FirstLook study involved hundreds of thousands of pre-owned vehicles from a national sample of dealers across all major brands and regions, looking at trending since August.

“We are telling dealers, ‘That downward pressure you’ve been feeling at wholesale is not your imagination,’” Ryan says.

Dealers can do two things to clear out aging used-car inventory. One is to “retail their way out of it” with aggressive pricing and advertising, he says.

Two is to dispose of dud vehicles on the wholesale market. “If you are doing that, be realistic,” Ryan advises dealers. “Don’t look in the rear-view mirror. That vehicle you bought in August may be worth less now than when you paid for it.’”

The good news is “there will be buying opportunities ahead as the market corrects itself.”

sfinlay@wardsauto.com