Last updated Tuesday, June 7, 2011

Are we in a "bubble?"
There has been a lot of recent talk about whether or not we are experiencing a used vehicle pricing bubble. It's certainly tempting to compare what's happening in the market with our recent experience with what is referred to as the housing bubble. Of course the housing bubble had several contributing factors which the used auto market is not influenced by. Such things as creative mortgage options and creative derivative packages (those in the housing industry are certainly creative, aren't they?) are not part of our industry. But if what is meant by a bubble is simply unrealistically high prices caused by a variety of unusual factors acting together - a perfect storm of sorts - the current market may qualify. And if we only refer to bubbles as markets that have the potential to burst, this may also qualify.

Some of us have clearly been scratching our heads at the prices certain segments of vehicles are bringing. The combined factors of:
     *reduced new vehicle inventories as manufacturers cut production in response to much diminished yearly sales
      expectations
     *reduced supply of used vehicles as a result of a couple of years of diminished new vehicle sales
     *diminished supply of trade-ins as a result of diminished new vehicle sales
     *reduced program vehicles as a result of less rental car volume
     *manufacturers re-evaluation of the overall impact of fleet sales
     *rising fuel prices
     *Japanese production issues as a result of the tsunami

have all contributed to a somewhat warped market. Such is the perfect storm whereby econo-cars and price range vehicles have prospered inordinately at the expense of gas guzzling SUVs, pick-ups, and their ilk.

As in 2008 during the fuel price spike, the Toyota Prius has been the poster child for head scratching in the lanes. Since the beginning of the year we have raised the 2010 Prius $3500 to its current trade-in value of $21,000, and we are the lowest value among competitive valuation sources which range all the way up to just under $25,000. And that is not using the highest condition category. Last I looked, MSRP on a normally equipped Prius (2011 model!) is $25,280. The inference is that you can mosey on down to your local Toyota dealer and trade in your 2010 model with 20K on it and get a one year newer new Prius for about $400. I would suggest that is a bubble waiting to burst. Granted, that is surely an extreme example, but there are many examples of other vehicles in this segment and others that cause one to question the sustainability of certain segments of the current market.

Buyers Becoming Increasingly Selective
We are not suggesting that the current market does not have pockets of strength. Our highly experienced and professional sources tell us, however, that the market is becoming increasingly selective and that as we move into the summer months caution might be advised. While the cream is still doing extremely well, more ordinary vehicles are much more difficult to sell and are priced accordingly. Low mileage vehicles are still chased vigorously while medium mileage vehicles are relatively ignored and again priced accordingly. Those of us whose responsibility is to reflect the totality of the market have to guard against being too heavily influenced by the exceptional vehicles and their exceptional prices.

Good News for Trucks?
Having said that, we think there may be opportunities in those segments of the market that have been severely beaten up primarily as a result of fuel price fears. We expect fuel prices to continue to moderate and think that those segments that have been most negatively affected during the recent market escalation, primarily domestic full size SUVs and pick-ups, are likely to strengthen as we move forward and provide some good buying and selling opportunities for those who get in early.

We also expect price range vehicles of all sorts, with some moderation among the econo-car segment as they gradually return to reality, to continue to show relative strength. There are simply not enough of these vehicles, good ones in particular, to meet a healthy demand.

The European and Asian luxury segment continues to be relatively stable.

Low Supply/Low Demand Mode
Summer is usually a bit of a challenge and we don't expect this year to be different. We do think that as we gain distance from those events that created extreme pricing in limited segments we need to pay particularly close attention to those segments. With those potentially volatile exceptions, we expect the market to be in a low supply/low demand mode and erode slowly but steadily in the coming months.

Dan Galves



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