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Sell Now?

The used car market is at its valuation peak – but the so-called bubble may be better characterized as an air mattress deflating. It’s all about supply.

June 22, 2011

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"Girl we couldn't get much higher. Come on baby, light my fire!" If there's anything that gets fleet consignors hot these days it's the prospect of selling into this strong wholesale market. Maybe Jim Morrison was singing about used car prices?

The Manheim Used Vehicle Value Index reached another historical peak in May. But the numbers are starting to soften moving into mid-June. For the week of June 13, Kelley Blue Book reported that values for subcompact, compact and hybrid cars have started to decline for the first time since January. Black Book values show that the same week marked the largest overall decline in vehicle values in more than three months, with the exception of one week in early May.

Have used car prices peaked? To understand the market forces at work, everything should be viewed through the prism of supply.

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The Japan crisis hit in March, just as the industry was returning to some normalcy after the recession, bankruptcy and a new manufacturing business model had already drastically reduced supply. That giant sucking sound you heard this Spring was the car rental industry taking whatever it could out of the market-both new and used-to replace lost orders. This aggravated already tight wholesale supply and drove up prices. At auction, small cars were selling for $500 to $1,000 more than they cost last fall-with 10,000 more miles on them.

This is clearly a market aberration that is in the midst of correcting itself. If you're in a position to sell your small cars, sell now. Fuel prices have topped out and the Japan supply issues are working themselves out. The market will never be better than this. Listen to the Lizard King: "The time to hesitate is through. No time to wallow in the mire."

If the market is coming down, by how much can we expect, and when?

Coming Soon

Post Labor Day will bring the usual selling off period, though this year the market will see more than its fair share of off-rental units with 50,000 miles on them-rental companies held those units through the Japan supply crunch to meet summer demand. However, "There may be a week or two where the market looks like it will fall off the cliff, but I don't think that will be sustainable," says Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book. Dealers are still hungry for inventory, Gutierrez says. There will be no glut.

Fuel prices won't crash as they did in 2008, at the onset of the recession. Back then, fleets got right-sized in a painful adjustment to fuel price trends. In terms of model mix, fleets aren't getting stuck with vehicles they can't sell. No such pricing chaos is expected this time.

This Fall

Art Spinella of CNW Research expects prices to slip in the third and fourth quarter by three to five percent. Gutierrez concurs. "If supply weren't an issue, then perhaps we would see these values drop more than 5 percent," he says.

By November, the market will begin processing the dearth of volume of off-lease units from the recession, which will keep supply tight and prices afloat. And though the Japan pipeline will be flowing again, no one is expecting a flood of new cars.

"Lack of vehicles in dealer inventory is not going away anytime soon," reports a national fleet dealer. "We'll struggle with vehicle inventories over the next year."

Looking Further

Off-lease supply will stay tight through all of 2012, until the lease returns from the 2010 recovery start hitting the market in 2013.

New car sales will rebound. Total sales could reach 12.6 million this year, a million more vehicles than last year's 11.6 million total. If half of those sales involve a trade in, another 500,000 units will enter the wholesale channel, says Tom Kontos, Adesa's chief economist.

"It may ease some of the tightness of supply but probably not enough to offset the off-lease decline," Kontos says. "More things are working against a growth in supply in the next 18 months than for a growth in supply."

After that, it's hard to predict too far into the future. There is always the specter of over production and deep new car discounts-and thus a spiral of back-end values. A booming economy and lower unemployment could lead automakers astray, and some upstart marques could make a market share play.

Yet, for a change, market watchers are guardedly optimistic. No one has lost their cynicism about how this could be screwed up again. It's just that, at least for the foreseeable future, the new manufacturing business model is easier to adhere to than deviate from.

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Author Bio

Chris Brown

Executive Editor

Chris Brown is the executive editor of Business Fleet Magazine and Auto Rental News. Through these publications, online newsletters, trade events and associations, Chris covers all aspects of the fleet world, including fleet management, manufacturer fleet activities, the fleet leasing industry, vehicle remarketing, rental industry news, car rental taxation and legislation.

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