CraigsList is not the be-all end-all of buying/selling things locally online. It may be a tough nut to crack, but it won't be hard to radically improve upon their horrible user experience. I would love to see some competition in this space.
Just make sure that when you launch - that you're not targeting SF/NYC.
(I will admit - there is local competitors that you would have to beat in most markets - so it's still tough - but it's not always cl.)
Your new site would have to be pretty fickin' special for me to post my ad there instead of to a massively larger audience on craigslist
Also, you can't exactly undercut them -- Craigslist is free for most categories and pretty reasonable for the others