IRVINE, Calif. -

The new-vehicle sales slowdown since 2008 is not only pushing wholesale used-vehicle prices higher, but Kelley Blue Book expects the supply of these used units to become even tighter.

Contained within the residual value discussion in the August edition of the Blue Book Market Report, Eric Ibara, KBB’s director of residual value consulting, explained how vital a role the auction plays, and how it can be a predictor of what’s to come.

“Used-car prices are established at what could be the greatest venue for the intersection of supply and demand: An auction,” Ibara began.

“The auction company and the sellers generally do everything they can to attract as many buyers as possible,” he continued. “This is one way in which the demand side of the equation is influenced. The supply side is generally a function of market conditions.

“The abrupt slowdown in new-car sales and the curtailing of leasing in 2008 created a shortage of used vehicles returning to market today,” Ibara went on to say. “The Kelley Blue Book forecast shows a significant decline in future used-car supply for selected segments.”

As one example, KBB thinks that starting later this year the full-size car segment could experience volume drops of about 50 percent.

Ibara said that trend “will undoubtedly affect used-car prices for these models.

“The key point in this discussion is that all segments are not affected by this volume drop-off in the same way,” he cautioned. “Some segments are barely impacted while others see a significant decline. The duration of the shortage also varies.

“Knowing what to expect in the future can help companies plan for the appropriate actions required to take advantage of this upcoming situation,” Ibara suggested.

More Analysis of Future Wholesale Price Movement

Another presidential election will likely have occurred by the time Kelley Blue Book expects to see significant softening of wholesale vehicle prices.

KBB’s manager of vehicle valuation Alec Gutierrez insisted the extended new-vehicle sales slump will impact used values for “years to come.”

Kelley Blue Book predicted that supply reductions, caused by the slump in new-vehicle sales and leasing during 2008, will continue to play a more prominent role in the wholesale market.

To support the claim, Gutierrez pointed out value changes that came in response to supply reductions. He noted the average value of a 1- to 3-year-old used vehicle has increased from $15,000 in 2008 to more than $23,000 in 2011, an average increase of 15.8 percent per year.

“It will take several years of strong sales to replenish the shortage of used vehicles driving up values today,” Gutierrez predicted.

“While the pace of appreciation is likely to subside as sales, and ultimately supply, improves, we expect values to remain strong for the next two to three years,” he continued.

Fuel Price Gains Not Enough to Stop Fuel-Efficient Value Declines

With fuel prices on the rise during the past 30 days, Gutierrez acknowledged it would seem logical to conclude that fuel-efficient vehicles may be set to rebound.

“Unfortunately, the market for these vehicles is not as simple,” he conceded.

According to Kelley Blue Book, values of fuel-efficient vehicles dropped approximately 3 percent in July, a cumulative drop of 5 percent since values peaked in June.

“These declines fall in line with July’s Blue Book Market Report, where we stated that values of fuel-efficient vehicles were due for a correction of approximately 15 percent by year-end,” Gutierrez explained.

Even with fuel prices rising 10 cents in the last 30 days, Kelley Blue Book field analysts continue to report dealers are unwilling to purchase these vehicles at their current elevated levels. While auction floors for fuel-efficient vehicles remain high, analysts also noticed many of these vehicles are not selling at auction.

“Currently, all data indicate that values for these vehicles show no sign of strengthening in the near-term,” Gutierrez noted.

He went on to explain the anticipated 10-percent decline from now until year-end will be driven mainly by the 20-cent decline in fuel prices projected by the Energy Information Administration (EIA).

“Fuel prices are likely to decline as the summer driving season wraps up, and according to recent reports, demand may already be showing signs of softening while supplies are ramping up,” Gutierrez said.

“In the past week, United States crude oil and gasoline supplies increased approximately 0.5 percent as the first of the 60-million barrels to be released by 28 member nations of the International Energy Agency (IEA) started to hit the market,” he continued.

“Additionally, the EIA reported that wholesale demand for gasoline has dropped 3.3 percent in the last four weeks, a drop that is unusual during the month of July,” Gutierrez went on to say.

“With that in mind, fuel prices are likely to decline in August, while continuing to drop through the rest of the year before finally coming to rest at $3.46 per gallon,” he added.

Dealers Can Garner Top-Dollar for Fuel-Efficient Vehicles in August

KBB believes most dealers are likely fall into one of two camps when it comes to fuel-efficient vehicles.

“There is a large segment of dealers who already have overstocked their inventory with fuel-efficient subcompact, compact and hybrid cars, and therefore are looking to unload their inventory,” Gutierrez shared.

“Alternatively, there are dealers who need to purchase these vehicles to satisfy the demand of their local consumers, but they are hesitant with the uncertainty of fuel price fluctuations and the current elevated floor pricing of those looking to unload these vehicles,” he continued.

For dealers looking to unload excess inventory, KBB declared there is no time like the present to try and sell these vehicles.

“Since we believe values of fuel-efficient vehicles will drop mildly in August, this may be the best opportunity to try and get top dollar for a fuel-efficient vehicle in today’s market,” Gutierrez surmised.

“As we approach Labor Day, values will begin to slip because rental car companies could potentially begin to unload their previous model-year inventory. With this in mind, dealers are advised to act fast,” he stressed.

Furthermore, KBB mentioned that dealers who are looking to purchase more fuel-efficient vehicles are likely to find more attractive pricing in the fourth quarter.

“Dealers should remain cautious on stocking up on inventory anytime soon, but that should not preclude them from ensuring they have at least a few fuel-efficient vehicles on their lot at all times,” Gutierrez recommended.

“Now is the time to be picky and to only bid on good-condition vehicles with low miles that can be turned in 30 days or less,” he added.

Prius Is Leading Indicator for Pricing in Fuel-Efficient Segment

Now that gas prices have fallen from their $4 per gallon May peak, Kelley Blue Book determined values for the Toyota Prius have declined 13 percent, a drop of $3,000 overall.

Although values appear to have stabilized in the last few weeks, Kelley Blue Book does not expect values to remain at current levels.

“Like most fuel-efficient vehicles today, the Prius remains inflated and is expected to decline further by year-end,” Gutierrez stated.

He believes this correction must occur for two reasons:

—Used-vehicle values are not sustainable near their original MSRP, and the 2010 Prius actually sold above MSRP for several months during 2011.

—Gas prices are expected to decline to $3.46 by year-end, according to a July EIA forecast.

As fuel prices fluctuate, KBB thinks the Prius can be viewed as a leading indicator of things to come for the fuel-efficient segment.

“The Prius is generally the first to increase as gas prices are on the rise, and conversely, the first to fall when gas prices start to decline,” Gutierrez recapped.

KBB analysts discovered the 2010 Prius reacted strongly to fluctuating fuel prices, probably more so than any other fuel-efficient vehicle this year. From January through June, Kelley Blue Book revealed the 2010 Prius increased 41 percent, up $7,000 overall.

“The jump in Prius pricing largely can be attributed to gas price fluctuations. However, the 2010 model-year was hit especially hard by the lack of new Prius inventory resulting from the earthquake in Japan,” Gutierrez noted.

Van, Full-Size Pickup Segments Show Greatest Residual Gains

Turning back to analysis of residual values, Eric Ibara, director of residual value consulting, Kelley Blue Book, found an interesting trend.

While the average overall 36-month residual value projection has changed little from the same period a year ago, Kelley Blue said the story is much different at the segment level.

Overall, Ibara calculated the car segment is down an average of 0.9 percentage points, while trucks are up 1.1 percentage points. He pointed out residual value averages by segment are not sales weighted.

Ibarra went on to illustrate all truck segments are either flat, meaning the year-over-year change is less than half a percentage point, or higher than the previous year. The largest gains are in the van and in the full-size pickup segments.

In the full-size pickup segment, KBB explained the gain was achieved through the improvement seen in heavy-duty trucks. Analysts mentioned several three-quarter and 1-ton trucks from Ram, Ford, Chevrolet and GMC all recently received facelifts and gained new diesel engines in 2011.

“Interestingly, the half-ton trucks from these brands all show year-over-year changes of less than a point,” Ibara discovered.

The KBB residual expert went on to note, “For Ram trucks, the heavy-duty year-over-year increase was the result of gains across the Regular, Mega and Crew Cab trims. Ford’s improvement was the result of gains mostly in Crew Cab models, especially in the F-350 and F-450 versions. For Chevrolet, like Ram, the increases were across the board. An exception to the strength in the full-size pickup segment is the Chevrolet Avalanche, which was last redesigned in 2007.”

Continuing on, KBB insisted the van segment recently has been revitalized through redesigns and facelifts of the Honda Odyssey, Toyota Sienna, Dodge Grand Caravan and Chrysler Town & Country.

“As a result, we see year-over-year gains not only in these three minivans, but also with the Kia Sedona, Chevrolet Savana and GMC Express vans,” Ibara shared.

“While not recently redesigned, Sedona auction values have consistently out-performed residual value projections from last year,” he continued.
Ibara also conceded that the Grand Caravan’s 36-month residual value is higher than it was last year, while the Town & Country declined.

“This can be traced to the higher prices and equipment level on the Town & Country, and to newer trims being added to the Grand Caravan,” he pointed out.

Bucking the trend of higher residual values for trucks, KBB determined the midsize pickup segment is down slightly compared to 2010.

“With one exception (the Ram Dakota), the domestic models in this segment are lower on a year-over-year basis due to lower auction values recorded during the last year,” Ibara indicated. “This compares to the Toyota Tacoma, which is up only slightly from last year’s values.”

In comparison, KBB pointed out all other car segments are down, including luxury, sports cars and hybrids.

Leading the drop in the hybrid/alternative energy car segment were the Honda Insight and Toyota Prius, which are both down significantly from last year.

“Although both models have enjoyed renewed strength early in the year, now given the moderate fuel-price increase forecast for the future combined with the increased competition in this and other segments, Kelley Blue Book’s outlook for this segment calls for softening values,” Ibara explained.

For the near-luxury car segment, KBB said models are either up only slightly or down, sometimes significantly, from the prior year.

“Most prominently, BMW’s 1-Series and 3-Series are down 7 percentage points due to lower auction values observed over the past year,” Ibara concluded.