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A Good Time to Trade in That Gently Used Car

Joseph B. White

Used-vehicle prices hit record highs; no new-car smell necessary with strong demand for fuel-efficient models.

That three-year-old car sitting in the driveway may not seem so exciting anymore, but to some car dealers it could be gold.

Informed shoppers with well-maintained cars to trade in have an unusual opportunity to take advantage of what industry analysts say is a record peak in used-car prices. Resale and trade-in values for late-model vehicles in good condition have been rising all year as demand has outstripped supply, particularly for fuel-efficient models.

Among the forces driving up used-car values is a shortage of many popular Japanese models due to production slowdowns following the March earthquake. And the sales collapse during the 2008 and 2009 financial crisis means fewer two- and three-year-old cars are available.

The National Automobile Dealers Association last week raised values again on many small- and medium-size cars in its latest Used Car Guide, which is widely used by dealers when deciding what to offer for cars taken as trade-ins.

A one-year-old Honda Civic that NADA's Used Car Guide valued at $14,275 in May is now estimated to be worth $15,950. "The same car," says Jonathan Banks, NADA's executive auto analyst.

KBB.com, the Web home of the Kelley Blue Book used-vehicle-pricing franchise, says a three-year-old Toyota Prius is worth, on average, $17,750 as a trade-in, up $6,050 from the value of a three-year-old Prius a year ago.

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The market isn't booming for all types of vehicles. Large sport utility vehicles, such as a Ford Expedition or Chevrolet Tahoe are down less than 1% from a year ago, according to NADA's guide. Still, they are up nearly 5% from the start of the year.

Late-model, mid-size luxury cars -- a segment that includes the Mercedes E-Class and the BMW 5-series -- are worth about 6% more on average than a year ago, according to NADA.

"We have seen extremely strong pricing," says Jeremy Meyer, national manager for Audi's U.S. certified pre-owned sales operation. And "consumers are willing to pay those higher prices," he says.

Manheim Consulting, an arm of the big Manheim auto-auction business, has for years published an index of used-vehicle values. In May, that index, using a scale with a baseline set at 100 for January 1995, was 127.8 -- a record high.

For consumers, this is now a game of arbitrage and information gathering. Prices for many new vehicles are up, but not as much as values for in-demand, late-model used cars.

"The best case scenario is that you have a trade-in that is somewhat gas efficient, and you are ready to trade for a larger vehicle," says Jesse Toprak of Truecar.com, an auto-shopping and data site.

For people who have a leased car that's close to the end of its term, now is the time to figure out whether that car is worth more than the residual value assigned in the lease contract.

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For example, a 2008 BMW 3-series has an average residual value of about $17,450, but a trade-in value of close to $20,000, according to data compiled by Truecar.

NADA's Mr. Banks says anyone with a leased car that's due to be returned should investigate the car's market value -- using the online NADA guide and shopping sites such as KBB.com, Edmunds.com, Cars.com or Ebay. Then be ready to bargain with the dealer to get a higher value than the one stipulated in the contract.

"Don't just hand over your keys," says Mr. Banks.

Realizing the extra value in a leased vehicle can be tricky, however. Selling a leased car to another individual could require buying it from the leasing company, then reselling it, and possibly paying sales tax.

Sergio Stiberman, chief executive of LeaseTrader.com, a site that enables the exchange of auto leases, says the easiest way is to use the difference between the purchase-option price written into the lease contract and the car's current market value as equity in a trade-in. The dealer can then work out the transaction with the leasing company and resell the car for a profit.

Dealers are stepping up efforts to snag high-quality used cars, while eyeing their inventories to make sure they don't get caught with too many vehicles at the top of the curve.

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At Group One Automotive, a big Houston-based dealer chain, used-car managers are scouring Craigslist, and emailing past customers to find more of the cars that are selling best. But the company is keeping its used-car inventory at or below 30 days' supply.

"We have to have rational exuberance," says company spokesman Pete DeLongchamps.

Will used-car prices come back to earth? Most likely, though telling when is educated guess work, not science. Gasoline prices are edging down, which could cool demand for used hybrids and rejuvenate interest in second-hand SUVs.

Japanese car makers say they are ramping up production as they work out the problems getting critical parts from suppliers damaged by the earthquake. Once their factories are rolling, industry executives and analysts expect Toyota Motor Corp. and the other big Japanese brands will come out swinging with discount deals to get back the market share they've lost. The cheaper new cars get, the more likely used-car prices will moderate as well.

A longer-term factor in the current scarcity of late-model used cars is that so few cars were leased during the credit crisis and recession of 2008 and 2009. Higher sales in the past year will mean more supply for the used-vehicle market of a 2013 or 2014.

Honda Motor

Write to Joseph B. White at joseph.white@wsj.com


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