Cash for Clunkers didn't kill the cheap car market, didn't even make a dent, sorry but that just isn't what happened.
What happened is a combination of several factors, the three largest are scrap metal prices, a really shitty economy, and the fact that everything has gotten expensive (looks like inflation to me, but I am told that isn't happening).
Scrap metal has been as high as $17 per 100pounds, meaning a 4000pound vehicle that doesn't run and needs a new engine, transmission interior, and has no paint left on the body is worth up to $700. Why would I sell you a running driving vehicle even in rough shape for that? Why deal with Craigslist when you can drive it down to the scrap yard and get that much? Of course that value is based strictly on selling the car whole to the crusher, plenty of guys have figured out that they can get a lot more by separating the copper, brass, aluminum from the cars and get a lot more, and are often willing to pay more than the scrap yard.
There is no such thing as a running $500 car anymore, they just aren't out there. Cars in running and driving condition in shabby condition are worth $1000, in good condition more.
The economy is obvious, all of those people dropping out of the workforce who keep the unemployment figures from looking scary? Most of them are actually still looking for work, they just aren't getting benefits, they aren't buying new cars, when they need a car they are looking on Craigslist for a cheap $500 beater just like you.
Our money isn't worth much, $500 today just doesn't buy as much as it did ten years ago, or even five years ago.
In 2006 I was hit by a moron while driving my 1995 Dodge Neon Coupe, it was totaled, I ended up getting about $2500 for it from the insurance company, and I was happy to get that much. At that time if I had tried to sell it myself in the condition it was in prior to the wreck I would have gotten $1500 at best. Today I drive essentially the same car, a 1998 Plymouth Neon Coupe, it has about the same miles as the old one, similar condition as well. I wouldn't sell this car for a penny less than $2500 cash, I would expect closer to $3500-4000 on an insurance settlement if it was hit and totaled. Our money just doesn't go as far as it used to, it doesn't matter if you are buying a used car or a cheeseburger at Burger King.