Last updated Thursday, October 25, 2007
We are rapidly approaching that time of year when all used vehicle valuation guides can feel like a dog chasing its tail. I like to call it a false market, where the prices paid for vehicles bear very little relationship to their actual value but are really a function of buyers not looking to buy encountering sellers who need to sell. Most buyers don't need inventory for the next several weeks. Sales are generally slow during the holiday period and current purchases can easily turn into aged inventory. They will buy, but price becomes the over-riding factor, not need. If it seems like it's too cheap to pass up, I'll buy it; otherwise I'll pass. That tends to be the general philosophy for the next six weeks or so. The good valuation guides (like Galves) reflect a valid current market and reluctant buyers tend to measure a vehicle's desirability this time of year by how much under "book" it can be bought: how cheap it is compared to "book." The difficulty for the "books" in this type of market is that no matter how much you lower the values, buyers are still looking to buy "under book." Hence a false market and the potential to be a tail chasing dog.
Most vehicles have dropped considerably in the past couple of months as the market has softened to meet a general slackening of demand and the introduction of new products. We tend to think we are well positioned for the current market but are very much aware that many sales will reflect the above scenario and not reflect actual value. While we do expect most vehicles to continue to experience some erosion in book values, we try to moderate what we do at this time of year to take into account the time of year and that false market.
Having said that, I think you can expect to see a bit more than the usual erosion in two categories in particular: very late model vehicles and luxury vehicles whose supply far surpasses demand with rare exceptions. We have already experienced much of that in the past couple of months. Current year vehicles (2007) and one year old vehicles have been pretty hard hit of late, even the more popular imports. As one of our consultants is fond of pointing out, there is a squeezing of year-to-year spreads in this market so the 2005's sell well in relation to book and sometimes approach the poor performing 2006's and 2007's in actual values. The luxury segment is still experiencing relatively large volumes of vehicles returning to market as a result of their high level of lease penetration. Couple that with a demand that continues to slacken at this time of year and you have the recipe for continually eroding values in that segment.
With those two exceptions (and of course convertibles in general at this time of year) we think the market will soften moderately through mid-December, but beware of the false market we've described and try to avoid being in the position of needing to sell.