McLEAN, Va. — The NADA Used Car Guide reports that auction prices through May experienced minor declines relative to April, and indicators point to this downward trend carrying on through the rest of the year.

Jonathan Banks, executive automotive analyst for NADA Used Car Guide, indicated overall prices for 1- to 5-year-old vehicles declined about 0.5 percent, which he conceded is less than the expected seasonal drop for the industry. However, Banks and his colleagues reminded dealers they predicted this trend and incorporated mild value depreciation for a large number of vehicles in the May and June editions of the Used Car Guide.

Analysts reiterated the reason for the relative price strength in the industry primarily was low supply relative to strong consumer demand. But they expect that strength to moderate somewhat during the second half of the year.

Banks listed several reasons for this situation:

—Effects of a stronger new-vehicle market.

—Continuation of attractive new-vehicle incentives.

—A slight uptick in returning used supply, notably in the overall amount for CUVs and off-rental inventories in general.

"They apply downward pressure and help to stabilize used-vehicle prices," Banks stressed.

Nonetheless, NADA Used Car Guide noted several segments continue to outperform expectations. One example analysts shared was midsize vans, a segment where year-to-date auction prices are higher by about 12 percent.

The company also pointed out that stability or slight positive movements in recent months for large SUVs and large pickups caught its attention, especially in light of rather dramatic price increases both of these segments during 2009 and at the outset of this year.

Going the other way, analysts mentioned luxury segment auction prices continued to experience deprecation during May. They indicated those prices are lagging all other segments in terms of performance over the course of the year.

"Overall, auction prices continue to follow the expected course of stability and reflect a strong market for used vehicles," Banks stated.

"June prices are expected to follow suit with no major price fluctuations foreseen at this time," he added.

Analysis of Rental Fleet Penetration

Banks cautioned about how much steady increases in new-sales volume overall should be attributed to vehicles sold into daily rental fleets. He emphasized that new-vehicle sales to daily rental firms offer clear benefits when volume, build and remarketing are handled in a responsible way.

NADA Used Car Guide offered four principles to ensuring that strategy comes to fruition.

—Rental firms must incorporate new vehicles on a regular basis to keep fleets fresh and remain competitive by creating consistent demand.

—Manufacturers have another channel with which to record a new-vehicle sale. Prices and volumes are negotiated before the sale thereby enabling planned production and accurate sales forecasting.

—Fleet vehicles provide a customer's first point of contact with a new model, thereby creating awareness and exposure at a low cost to the consumer. Because of this, manufacturers should ensure that rental vehicle content mirrors retail demand to ensure a positive consumer experience as well as helping with remarketing.

—Strategic volume planning and remarketing preserves used vehicle value retention, which is a positive for all parties. If executed properly fleet sales do not erode brand value, and rental firms — in a risk arrangement — realize a greater return on investment at time of dispossession.

Analysts reminded the industry about the potential for a corrosive impact when volume sold to rental firms becomes unbalanced relative to consumer demand. They stressed used-vehicle prices on 1-, 2-, and even 3-year old units bow to the pressure placed upon them by large supplies of off-rental units.

"It should be noted that a supply and demand imbalance is not the only concern," Banks interjected. "Consistently high rental fleet penetration rates can create a negative perception for a particular model in the consumer's mind.

"The Ford Taurus from two generations ago is a perfect example of this," he added.

NADA Used Car Guide believes manufacturers have recognized the risks posed by rental fleet over-exposure for some time now. The company also thinks automakers have made concerted efforts to manage the volume of vehicles placed into rental fleet more intelligently.

"This has become somewhat easier for domestic OEMs in the post-bankruptcy era as production capacity is better aligned with overall demand," Banks pointed out.

Analysts backed up Bank's assertion by stating the volume of domestic vehicles placed into rental fleets has been moving downward since 2006. They mentioned although Asian OEM volume has remained fairly flat, there has been some brand reallocation as Korean companies have filled any voids left by their Japanese counterparts.

Despite all of the planning and recent trend behavior, NADA Used Car Guide still remained apprehensive about certain models with a fleet penetration above 30 percent. Several of those vehicles are made by Chrysler, including the Chrysler Sebring (73 percent), Dodge Caliber (69 percent), Dodge Avenger (62 percent) and the Dodge Charger (61 percent). Other notably high percentages were associated with a pair of Mitsubishi models, the Endeavor (63 percent) and Galant (75 percent).

"Although demand for new vehicles has been considerably stronger in 2010 relative to the same period of time in 2009, for certain brands and models the real rate of recovery in consumer demand has been masked by a disproportionate number of sales to daily rental fleets," Banks asserted.

"Further, the risk of used-value erosion for these brands and models will be higher than otherwise when large volumes of dispossessed rental units begin to enter the used market in the fall," he continued. "As such, their price performance will bear closer scrutiny by NADA's editorial staff as that season approaches."

Deeper Look at Large SUVs in Relation to Fuel Cost

As predictions mount that prices at the gas pump could rise again, NADA Used Car Guide took the chance again to review a segment that's impacted significantly by fuel costs.

Analysts insisted the large SUV segment has experienced significant strength over the past 18 months due primarily to relatively stable gasoline prices during the same period of time. They mentioned since July 2008 when gas prices reached a national average above $4 per gallon, the average used price for large SUVs 5 years and newer increased by more than 60 percent.

During that same span, the company determined the average price of regular grade gasoline declined by about 30 percent.

"With this said, many are wondering how much longer increases in used prices for the segment can continue," Banks contemplated.

"Clearly the answer lays in the future performance of the two variables which have contributed most to the segment's recent run of strength; gas prices and returning used supply," he responded.

"Large SUVs provide a perfect example of where a sustained increase in gas prices has proven to have a negative impact on vehicle segments sensitive to fuel economy," Banks went on to say.

To illustrate the point, NADA Used Car Guide put some figures together if gas prices fell from $3 to $2 per gallon or if they rose from $3 back to $4. If the decrease happened, analysts think the average price of a large SUV would rise by roughly $1,300. If the fuel price spike occurred, the median price for a unit in this segment would drop by approximately $1,900.

So, which way will the price of fuel go?

"With the economic recovery gaining steam, some analysts are predicting gas prices will approach and perhaps surpass $3 per gallon," Banks explained.

"The economy added 290,000 jobs in the month of April, and the Labor Department revised employment figures for February and March to show 121,000 more jobs were added than previously thought," he continued.

"On the other hand real GDP did not rise as much as analysts had expected, but the first quarter growth rate of 3.2 percent is still indicative of expansion," Banks added.

With all of that activity in mind, NADA Used Car Guide hesitated but decided to keep its baseline gas price forecast for the remainder of this year at an average of about $2.90 per gallon.

"Even if the economic expansion takes root and the threat of a double dip recession fades, NADA is predicting wide swings in the price of gas," Banks conceded.

"This being said, the threat of inflation and increasing global demand has the potential to push the price of gas towards $4 per gallon," he went on to say. "With the Federal Reserve ballooning monetary base, inflation is inevitable unless the Fed reverses direction.

"Other economic indicators have the potential to mitigate this upward movement," Banks also noted. "The European bond crisis has caused the dollar to strengthen against the Euro, and a strong dollar typically indicates lower gas prices. Due to the unpredictability in these counterbalancing indicators, the safe bet is that fuel prices will continue to be volatile near-term, moving around NADA's baseline forecast."