Pop Goes Used-Car Values?

Expect a bubble burst in used-car values in the aftermath of the federal government's popular “Cash for Clunkers” incentive program, says an analyst for Kelley Blue Book, a vehicle-pricing guide.

With $3 billion in incentive money and 750,000 new vehicles expected to be sold, the success of the clunker program is evident.

With a total of 750,000 vehicles being removed from the marketplace, dealers are stocking up on used inventory in anticipation of low supply and high demand.

This is driving used-car prices up significantly in the short term, causing a bubble in values that will seriously impact used-vehicle values after the Clunkers program ends, says Alec Gutierrez, Kelley's senior analyst-vehicle valuation.

“Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery,” he says.

“As a result, dealers are going to auction to restock inventory, driving up used-car values,” he says. “However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short-term, exacerbating the already-limited supply at auction.”

If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down, he says. “Ultimately, there will be the possibility of a severe contraction in auto sales.”

Overall, the increase in used-vehicle values ultimately could drive up new-vehicle transaction prices, several experts say.

Price trends in the wholesale market often are a leading indicator of conditions in the economy and future new-vehicle demand.