FREDERICK, Md., and McLEAN, Va. -

NADA Used Car Guide didn’t expect the sagging wholesale prices for compact cars dealers experienced during the first two weeks of October.

Executive automotive analyst Jonathan Banks admitted this week that stretch has been “incredibly bad” for small cars prices.

“We’ve already seen between a 3- and 6-percent decline depending on the model year,” Banks shared during a Webinar orchestrated by the National Auto Auction Association that also included NAAA’s Ira Silver and Frank Hackett.

“Obviously NADA didn’t forecast this, so our values for October are going to be very bullish compared to what you’re seeing in the auctions, because we did not anticipate the October declines to be so great,” Banks continued.

“As we move into November, we’ve taken this into consideration. But we are not expecting to see the downward movement on the small cars to continue,” he went on to say.

So why did the compact car price movement catch NADA UCG by surprise? Banks has a couple of theories.

“The reason we weren’t expecting it is because we felt that there was relative stability in the market,” Banks stressed. “The one thing that did happen this month that we didn’t think would was we saw a large amount of rental supply coming back through the market.

“Remember prices year-over-year are still very strong, so we were anticipating a decline, just not at this rate,” he continued. “This is something I’m still digging in deeper to see if the factors are still going to be in play. I want to figure out if the volume from rental increased the already happening downward trend we were seeing from cars.

“My understanding is we’ve seen the majority of the rental volume come through,” Banks surmised. “Probably within the next two weeks, we’ll see more high volume, then it will taper off a bit during November and December. The impact is probably going to be very short-term.”

Banks recapped that compact car prices likely peaked in May when fuel costs escalated, too. However, with gas prices likely to level to $3.40 per gallon by the end of the year, NADA UCG expects compact car prices to be down by as much as 7 percent at Christmas time from where they were to open 2011.

Another element Banks said might have pushed compact car wholesale prices down quicker than expected was the tightening difference between retail prices for new and used models.

The NADA UCG analyst referenced an MSNBC article that attempted to explain this situation to average consumers, and the story evidently spread online.

“Dealers are well aware about the gap between new and used, so they may have adjusted what they’re paying for wholesale cars,” Banks stated.

Are Incentives About to Rise?

Turning back to a topic that’s been discussed for several weeks, Banks looked at whether or not automakers are going to ramp up incentives to goose new-vehicle sales.

“It’s still a big question mark,” Banks admitted. “I think the consensus is incentives will increase but perhaps the domestics won’t follow. (Dan) Akerson’s statement from GM recently was their sales forecast is fairly realistic, which hints to the fact that they don’t need to chase sales with incentives.

“I do think those incentives will be concentrated on small and midsize cars by Honda and Toyota to get back some of those sales,” Banks added.

Both Toyota and Honda have insisted production is near or already back at full capacity after slowing because of the earthquake and tsunami in Japan back in March, the reason why Silver, NAAA’s economist, thinks new-vehicle sales will be 12.5 million this year and at least 13 million next year.

“I think we could get even more than that next year. That’s certainly a positive for our industry,” Silver surmised.

Overall Wholesale Volume Projections

With nearly 10 months of 2011 in the books, Silver projected that 7.7 million units will be sold at NAAA auctions this year, a figure that is off by 8 percent from last year’s total of 8.42 million units.

Should Silver’s estimation hold true, it would mark the fourth year in a row of softening annual wholesale unit sales. The streak began when the total from 2007 came in at 9.54 million units, a shade below the industry high of 9.96 million units back in 2003.

Silver thinks the wholesale market finally will take an upward turn next year — climbing 2 percent to 7.9 million units.

“Although housing has been weak, motor vehicles have come back. It would probably be even better if it wasn’t for the fact of the Japanese earthquake that affected supply,” Silver indicated.