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Monday, May 16, 2011

Dealers fear used-car bubble

Auction prices soar, but some say retail demand isn't on same pace
Already high used-vehicle prices are surging at auctions as dealers anticipate gaps in new-car inventories and snatch up used vehicles to fill their lots.

Fears of impending new-vehicle shortages as a result of the March 11 earthquake have pushed up used-vehicle prices. In recent weeks those fears have created a buying frenzy, especially for late-model, fuel-efficient vehicles.

But Damon Schoen, wholesale director at Hamilton Nissan in Hagerstown, Md., and others say retail demand for those vehicles has yet to catch up with the wholesale demand. They warn that used-vehicle auction prices could drop sharply.

Last week Schoen saw 2010 Hyundai Accents with 30,000 miles selling at auction for around $10,500 -- about $2,000 more than he would have paid at the end of February, he says.

His customers aren't clamoring for small used cars, he says, because they would pay almost as much for a used one as a new one. And he acknowledges that he might have to rejoin the bidding if he runs low.

"I participated in the bubble process," he says. "I have enough of these little things gathered up. When we start selling a couple, I'll be forced to go back to the well to replace them."

Michelle Primm, managing partner at Cascade Auto Group, which sells Audi, Mazda, Porsche and Subaru vehicles in Cuyahoga Falls, Ohio, typically buys the used vehicles she needs through auctions run by the manufacturers of her brands. But even those prices have "overheated," she says.

In an effort to find used vehicles with lower prices she has expanded her search to include local classified ads for private sellers and vehicles that have been repossessed.

Primm says consumer demand doesn't line up with the auction bidding because the general population does not understand the inventory problem facing the industry over the next few months. Dealers must plan ahead so they are ready, she says. "Dealers plan 60, 90 or 100 days out. It's what we're good at."

Even so, some dealers and analysts warn that auction buyers could get stuck with vehicles for which they overpaid. Falling new-car prices or lower gasoline prices could prompt a drop in used-vehicle prices, they say.

Since the Japan quake, rising new-vehicle transaction prices have, in turn, lifted used-vehicle prices. But that could change.

Last week, after announcing that its North American factories would be cranking up production sooner than expected, Toyota Motor Sales U.S.A. announced regional cash, interest-rate and lease incentives on most vehicles. Nissan Motor Co. followed suit.

Up 10% in one month
But for now, wholesale used-vehicle prices continue to surge. In its June 1 edition, NADA Used Car Guide raises its suggested prices of used small vehicles by about 10 percent from May levels. And some nameplates will jump even more.

For June, the NADA Guide raises the price of a 2007 Toyota Prius by $1,950, or 15 percent from May, to $15,350 and a 2010 Honda Civic LX sedan by $1,675, or almost 12 percent, to $15,950.

The increases are not limited to Japanese-brand vehicles. The NADA Guide raises the average price of the 2007 Chevrolet Aveo LS sedan by $750, or 14 percent, to $6,125, and that of the 2010 Hyundai Accent GLS by $1,175, or 11 percent, to $11,900.

Typically, used-vehicle prices peak in March and decline from April through June, says Jonathan Banks, NADA Used Car Guide senior director of editorial and data services.

This year, he predicts, used-vehicle prices will peak in June and flatten on the high side in July as new-vehicle prices gradually rise because of lower incentives and higher sticker prices. "We saw new-car incentives on small cars go down by about $400 from March to April. And we expect a similar move from April to May, which means used-car prices can go up," Banks says.

Pump price impact
Alec Gutierrez, manager of vehicle valuation at Kelley Blue Book, cautioned dealers to resist the temptation to load up on fuel-efficient vehicles. He says gasoline prices are predicted to fall in mid to late summer. When that happens, prices of fuel-efficient vehicles will drop significantly.

The price of the benchmark West Texas Intermediate crude oil hovered around $99 a barrel late last week, after flirting with $115 a barrel early this month.

"As we saw in 2008, when gas prices peaked at $4.10 per gallon, by year end we were back down to $1.60," Gutierrez says. "We're not saying we think prices are going to drop that much, but $3 or $3.50 a gallon is a possibility."

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