No trade-in, no deal

Doug Fox, owner of a Michigan Acura dealership, watched a deal evaporate last month when the 2006 pickup that a shopper planned to trade was appraised at $6,000 less than he owed.

Falling used-car prices have erased about 6 million potential buyers from the U.S. new-car market as they struggle with loan balances exceeding the value of their old vehicles, researchers at J.D. Power & Associates estimate.

Losing those trade-ins shows how the credit crunch is helping drag auto sales to their lowest level since the early 1980s, as lenders abandon the practice of letting consumers roll the deficit from an old loan into the purchase of a new vehicle.

“In earlier years we might have been able to add $6,000 to the price of the new car and finance the entire amount,” said Mr. Fox, owner of Ann Arbor Acura. “Now it’s very difficult to get bank approval for these kinds of loans.”

Prices paid for used autos, particularly large pickups and sport utility vehicles, plunged in mid-2008 when gasoline in the U.S. surpassed $4 a gallon. The average used vehicle fetched 15 percent less at year’s end than in September 2007, according to Manheim Auctions, the largest operator of wholesale auto auctions.

“All the big trucks and SUVs took an immediate hit,” said John Bruno, a partner in the Potamkin General Motors franchise in Manhattan, N.Y. “People bringing in Chevy Suburbans they thought were worth $40,000 found out they really were worth $25,000.”

The so-called upside-down loans add to the pressure on an auto market ravaged by job losses that sent the unemployment rate to 7.6 percent last month, a 16-year high. Sales in January occurred at an annual rate of 9.6 million units after averaging more than 16 million a year this decade.

Slumping demand weighs heaviest on General Motors Corp., Ford Motor Co. and Chrysler LLC, which have posted four straight months of declines of at least 30 percent.

“People as they try to build up equity are driving their cars an average of eight months longer than usual,” said Gary Dilts, senior vice president at Westlake Village, Calif.-based J.D. Power. Trade-in vehicles averaged 76 months old in December, up from 68 months a year earlier.

Drivers stuck with autos they otherwise would trade in reflects “trapped demand,” according to J.D. Power, which gave its estimate to a panel last month at the convention of the National Automobile Dealers Association in New Orleans.

“Rolling negative equity into new loans is a game that’s gone on,” said Tom Webb, chief economist at Manheim Auctions. “Obviously, it’s over.”

Mr. Bruno, the New York GM dealer, estimated he is losing as many as 25 percent of his potential sales because customers who agree to terms can’t get financing. When a trade-in has negative equity, completing a deal sometimes means reducing or erasing the deficit by cutting the dealership’s profit, Mr. Bruno said.

“Our clientele is very high caliber, and they’re surprised to hear they can’t qualify for a loan like they once could,” he said. “They bought cars and never had a problem. Now the banks are turning down people with very good credit scores right and left.”

That was the case with the shopper at Fox’s Michigan dealership for Honda Motor Co.’s Acura.

The man paid $33,000 for the pickup from GM’s GMC and had a $21,000 balance on his loan, only to receive an appraised value of $15,000 when he tried to use it in trade for a TL sedan, Mr. Fox said.

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