SAN DIEGO – Used-car prices are expected to stay strong this year for two time-tested reasons: low supply and high demand.

“We’ll see a good used-car market in 2011 and possibly three years from now,” says Ricky Beggs, managing editor of the Black Book, a pre-owned vehicle price guide.

There is a shortage of late-model used vehicles, “and it is going to stay that way,” says Bob Graham, vice president-asset marketing for ARI, an auto remarketing firm.

Supplies are low in part because of the drop in new-car sales. Those deliveries declined from 16.1 million units in 2007 to 13.2 million in 2008 to 10.4 million in 2009. The new- and used-car markets are inextricably linked. A saying in the pre-owned business is that all used cars start out as new cars.

“When we are not producing a lot of new cars, we are not producing a lot of used cars for the future,” says Linda Silverstein, Ford Motor Co.’s manager-remarketing and rental operations.

That will change as new-car sales rebound, but it won’t change immediately, says Eric Lyman, OEM practice director for ALG Inc., a forecaster of vehicle residual prices.

“As used-car supply continues to be an issue, we’ll see used prices stay strong going forward,” he says. “When we see a significant increase in used-car supplies around 2015, we’ll see a decline in used-car strength.”

Another reason he cites for today’s relatively low used-car supplies is that car rental companies are keeping their fleet units longer – up to 18 months as opposed to six months previously.

Consumer frugality spurred by the recession has led many former new-car buyers to switch over to less-costly used vehicles. “Many consumers are stepping down from new to used,” Lyman says.

When hit by the new-car sales decline, dealers began placing greater emphasis on their used-car operations, particularly certified pre-owned programs. Those offer cars that are inspected and reconditioned when necessary. They come with auto-maker warranties.

“We’ve heard from dealers that CPO is the last frontier where they can make money,” Juan Flores, Kelley Blue Book’s director-vehicle valuation, says at the National Remarketing Conference here.

“Customers in our market are coming in and asking for certified cars,” says Craig Martinez, general sales manager at JM Lexus in Margate, FL. “But it is getting harder to stock these vehicles.”

Certified cars sell at a premium. But buyers are willing to pay only so much, says James O’Brien, general manager of TrueCar.com, a research firm. “Consumers see CPOs as $600 to $1,000 higher than a car that’s not certified. If the CPO is more than $1,000, you won’t get the phone call.”

Success in selling used cars requires a firm knowledge of values for individual makes and models in particular markets, he says.

Dealers buying vehicles wholesale and selling them retail “need to make decisions on individual cars, not on aggregate prices,” he says.

Adds Beggs: “Every used car is unique and every dealer market is unique, with different overheads and different customers.”

Correct pricing reigns supreme, says Chuck Yaeger, CPO manager for Toyota Motor Sales U.S.A.’s Lexus luxury brand.

“Dealers do an amazing job in researching used cars that are cream of the crop,” he says. “But most important is whether you have the car priced right. That’s what the customer is interested in.”

Although used-car values will remain strong this year, there probably won’t be the pricing volatility seen in some vehicle segments at various times during 2010, experts say.

“We’ll see more normality in prices,” O’Brien says. “We saw an overreaction.”

Graham adds: “With the shortage of inventory, buyers were out there trying to get any vehicle they could.”

If consumers think used-car prices are high on the retail lots, dealers likewise beef about wholesale-auction prices.

“Dealers complain the price of used cars is bumping into the price of new,” says Dan Kennedy, General Motors Co.’s general manager-remarketing.

But a natural barrier separates used- and new-car prices. If they get too close to one another, consumers typically opt for the new vehicle.

Used-car prices are expected to come in at 37 million units for 2010, says Tom Webb, chief economist for Manheim Consulting. That compares with expected new-car sales of about 11.5 million units.

The vibrant and sometimes-volatile used-car market is not for the faint-hearted.

“This is about the most complex business I’ve ever seen,” O’Brien says. “It’s a hard business to understand and to perfect.”

Dealers must work at it, says Greg Miller, CEO of Larry H. Miller Group of Companies, a Sandy, UT-based firm with 41 dealerships.

“It takes skill, knowledge and effort to profitably run a used-car operation,” he says. “You can win and lose there faster than any other part of a dealership. You need to be good to survive.”

Yet, survivors abound, says Jack Fitzgerald, a multi-franchise dealer based in Bethesda, MD. “The used-car business keeps on humming.”

sfinlay@wardsauto.com