Last updated Wednesday, February 18, 2009

What have we been hearing during the last month?
I’m hearing glowing reports of the strong current market conditions dealers are experiencing as they go about their routine of buying, selling, and trading used vehicles at wholesale and retail. That would certainly seem to be good news after many months of dealing with the extremes of a market dominated by unprecedented fluctuations in fuel prices and a general economic turmoil and confusion.

What’s driving the current used vehicle market?
It makes me question what is driving such a strengthened market despite the frightening economy and diminished spending in so many other segments of the economy. People do need transportation and whenever there is a prolonged period of poor sales numbers it is usually followed by period of heightened retail activity as normal vehicle attrition builds up demand among those consumers who have to buy a vehicle rather than want to buy a vehicle. I suspect that some of the heightened activity is a result of that. But I also suspect that some of the relative strength in the market is the recognition among many new vehicle franchised dealers that if they are to muddle through the coming months they are going to have to depend on used vehicle sales to a greater extent than they might have in the past. That would explain some of the demand we are seeing in the wholesale industry and together with a diminished supply in many vehicle segments would contribute to a rise in prices. Whether that demand will be sustained because of increased retail activity remains to be seen.  

Still feeling the effects of the 2008 Used Vehicle Market?
It may also be the case that perception is greater than reality. 2008 was a most unusual year in the used vehicle industry. Between the fluctuation in fuel prices and the stumbling economy we experienced unprecedented ups and downs in the values of vehicles. It could be that what we are perceiving as a very strong market is really more of a “return to normalcy” after some very abnormal behavior in a number of vehicle segments. In general, the significant movement that is occurring currently is among those segments that were most affected, positively or negatively, by the spike in fuel prices we experienced this year. Now that fuel is half what it was six months ago and people are beginning to perceive the recent price levels as more the norm (how quickly we forget!), those vehicles that were depressed or inflated as consumers and dealers reacted to the exorbitant gasoline prices are rapidly returning to normalcy. Full size SUVs, for example, were hardest hit by the high fuel prices. Some examples of this:

       A 2006 Chevrolet Tahoe LS dropped $4,900  (from $16,000 to $11,100),
       in just over three months this spring/summer. Prior to that it had taken
       18 months to drop a similar amount.  

      A 2006 Ford Expedition XLT dropped $5,500 over a six month period
       last year. It had only dropped $4,700 in the previous year and a half.

Economical vehicles, on the other hand, either appreciated or held steady over the same time period. For example: 

     A 2006 Prius appreciated $2,500 over a six month period last year.
      A 2006 Mini appreciated $1,700 over a six month period last year.

Unusual? Consider this: In January of 2008 a 2006 Chevy Tahoe LS ($17,450), a 2006 Ford Expedition XLT ($16,350), a 2006 Toyota Prius ($16,500), and a 2006 Mini Cooper S ($16,000) were worth very similar money. Six months later the Prius was worth about $7,500 more than the SUVs, and the Mini about $6,500 more.  

Where is the market going in the next 60 days?
A brief look at the July 2008 numbers listed above will give you some idea of how much consumers and dealers typically over-react to such circumstances as occurred with fuel prices in 2008. Much of what we are seeing now is “water seeking its true level” as vehicles gravitate to more appropriate relationships to each other. What looks like a very strong market for trucks and SUVs and weakness in the economy market may be somewhat misleading.  Most vehicle segments are down a bit from where they were a year ago at this time, but relative to the recent severely depressed market they are clearly strengthening.

Particularly strong are the older, lower price range vehicles that are in shorter supply and high demand as consumers who need to change vehicles are doing so as economically as possible. On the other hand, very late-model vehicles are generally soft, many 2008 models approaching 2007 level pricing if they can generate any interest at all, as dealers remain wary of what the next round of manufacturers’ rebates and incentives may bring.

What are some areas of the market where you need to act or react?
It looks as if the European and Asian luxury segments may be perking up a bit as well. Except for full size trucks and SUVs these luxury segments were the hardest hit in 2008. Overwhelming supply was the culprit in most cases as that segment is down anywhere from 10%-30% from where it was a year ago. At the extreme, a two year old Mercedes E-Class, for instance, is worth about $7,000 less than it was a year ago, down almost 30%.  In general, the European and Asian luxury segment is down 10%-15% year to year. Smart consumers with the money to spend are beginning to recognize that there are some real values in this segment and 2009 may well see improvement among these vehicles.

Ultimately what will determine the strength of the market in the near future will be consumer demand, and that is a variable that has yet to be determined. Recent signs are positive, however, and there is some optimism, if somewhat reserved, regarding the coming weeks.     

Dan Galves