l was looking into buying one and looked up the KBB price for private party and it was like $17000in excellent condition. That does not seem right...

That is about right. Subarus hold their value very well. New, they cost l think between 23,000-30,000 l am not sure, l work more with domestics, but l do know that Subies are amazing cars and they hardly depreciate.

For a small car, the subaru is do not get very good MPG. If gas continues to climb they wont hold their value.

My dad owns a 2005 legacy GT Sedan Limited. He payed about 31,000 l think it was. Hes got a few factory options on it thats why it was $31,000. He now has 52k miles on it. But on kbb its rated at $18,000 (private party)$21,000(suggested retail value) in excellent condition(which it really is in). l am surprised on how the value had really gone down on this car too. But based on my dads car value & the one ur looking at its only one grand. l do not know any details on the legacy ur looking at but as far as buying a car u think has problems because of the 'cheap price' l do not think so. But l would just take it for a test drive/ test drive to the Subaru dealership & ask them to possibly look at it just to be safe

Part of the reason for the depreciation could be because Subaru considers piston slap to be normal. Listen to a 2.5 motor when it is started for the first time in the morning when the temp is below 40 degrees (F) outside. Sounds like a diesel motor. Subaru cars also have a higher than normal rate of head gasket failure from the late 90s to 2003. (Link below for 2003) So their reputation has gone down among many owners.
http://autos.msn.com/research/vip/Reliability.aspx?year=2003&make=Subaru&model=Legacy&trimid=-1

(USA Answer)

Subaru changed the chassis code (BP) and added a turbo model to the Legacy GT starting in 2006. So the 05 model is the last year the GT came w/o a turbo. Depending on your wants that may be considered less desirable. Could be just one more reason the price has depreciated like it has.