2008: The Year in Review

       

As 2008 draws to a close, it can be said that this has been a most unusual year for the automotive industry. That is, of course, an understatement. This has been an unprecedented year, and certainly the most challenging year we’ve experienced since we first began publishing our trade-in values in 1957. A perfect storm of events – a doubling of fuel prices for much of the year, a faltering economy accompanied by a 40% decline in the stock markets, the demise of several major financial institutions and a government bailout of several others, a housing crisis threatening the stability of many families and their financial foundation, record level increases in unemployment, a dramatically changing political climate, to name a few – has conspired to undermine our overall economic stability. While the automobile industry has not been suffering alone, it has certainly been hard hit and is likely to experience long term issues as we fight our way through this very difficult business cycle.

         Subjectively speaking, this has been a year without rest. As those of us who have been active in the industry for any length of time know, there are usually periods of the year when the used vehicle markets are extremely stable and experience little fluctuation. Historically those stable periods offer those of us in the guidebook business time to focus on some of the fringe components of the business while still safely watching our critical pricing responsibility. Not so this year. First the spike in fuel prices created significant movement among both the fuel-sippers and the fuel-guzzlers. Each market segment (and those in-between) demanded careful attention as consumers responded to the abrupt economic impact of fuel costs on their budgets and their response eventually filtered down to dealers’ buying/trading decisions.  Then the already supply-burdened luxury car and truck segment that demanded close watching and adjusting all year was further deflated by the economic crisis that brought demand almost to a halt. Ultimately that lack of demand reached down to all segments of the market and has brought us to where we are today.

Plenty of objective evidence exists to illustrate the unprecedented market we have experienced this year as well. In general, the luxury car and truck segment of the market has experienced a 15-30% decline from last year’s less than stellar market.  This has been a year of unprecedented erosion in used vehicle values as the following examples, based on Galves trade-in values, illustrate:  

Luxury Cars & SUV’s	December 2007	December 2008	Difference	Decrease
Two-year old Mercedes E350	$25,800	$18,200	$7,600	29%
Four-year old Mercedes S430	$27,500	$20,500	$7,000	25%
Three-year old Porsche Cayenne S	$32,800	$27,700	$5,100	16%
Three-year old BMW 750Li	$38,500	$33,000	$5,500	14%
Two-year old Lexus RX350	$29,000	$25,200	$3,800	13%

 

Mid-Level Cars & SUV’s	December 2007	December 2008	Difference	Decrease
Two-year old Ford Fusion SE	$10,900	$8,650	$2,250	21%
Two-year old Gr Cherokee Laredo	$13,200	$10,700	$2,500	19%
Two-year old Explorer Eddie Bauer	$16,100	$13,150	$2,950	18%
Three-year old Avalon XLS	$18,300	$15,600	$2,700	15%
Three-year old Accord EX	$12,900	$11,700	$1,200	9%

 

We believe that 2009 will continue to see steady declines, but not at the rate we saw this year. Much of the adjustment has already been made in the values and while we believe demand will continue to be diminished, so will supply. Eventually people need to replace vehicles and used vehicles should be in relatively high demand compared to new vehicles given their dramatically eroded values and consumers’ shrunken budgets.

 

 

An Unprecedented Market

We are currently in a somewhat unprecedented market. Not only have we had to deal with a fuel price issue (which has miraculously abated in the last month), we are now faced with a credit issue that together with a loss of disposable income and general confidence in the economy for a large segment of the consumer base has put severe downward pressure on an already shaky market.  And on top of that it is November, traditionally among the weakest of months in the wholesale auto industry. All in all, something of an imperfect storm. In short, the next couple of weeks should provide an excellent opportunity to buy vehicles but a poor climate in which to sell them.

Hardest hit may be those economy cars and trucks that spiked inordinately during the fuel price hikes. Because many dealers have stocked their inventories with them and have no further demand for them and fuel prices have moderated to the extent that consumers are no longer in panic mode, those vehicles are rapidly coming back to earth. Most vulnerable are the hybrids that experienced such a buying frenzy a couple of months back.

In general, late model vehicles of all sorts are experiencing particularly low demand levels. Buyers seem to be holding back for fear of what the next round of rebates and incentives might bring. For that reason, 2007 and 2008 vehicles of all sorts are generally softer than usual.

The market will probably see erosion in even the most traditionally stable vehicles. Honda Civics and Accords, Toyota Corollas and Camrys, Acura RSXs, Scions and their ilk are all likely to experience softening along with just about everything else in the marketplace. European and Asian luxury cars have already experienced significant declines and those are likely to continue, particularly among the more expensive models.

Even many vehicles in the most popular price ranges may suffer some along with everything else. They held up particularly well during the recent overall declines in the market and will probably decline some as general demand for vehicles of all sorts softens.

SUVs and pickups have actually moderated to some extent, probably due to a diminished supply and some short term memory issues for those consumers who pay attention to fuel prices.

We always reach a period of the year when no matter what the book says, buyers want to buy for less. I call it a false market. Sale prices may actually have only a passing resemblance to what vehicles should be worth and will be worth at some time in the near future. Our sense is that this false market will occur a bit early this year and may last for an extended period of time.

The Economic Crisis

I’m writing this as Congress debates how to deal with the current economic crisis that is stifling most of the nations business endeavors including, of course, the automotive industry. Reports are that at the present time there is very little action in the used vehicle marketplace, certainly not a surprise given the economic climate. With the exception of lease terminations and program vehicles there is very little supply. While that might normally signal an upturn in market conditions, a similar lack of demand is, it seems, creating a stagnant market that may very well have nowhere to go but down as we enter the normally sluggish months of October and November.

Previous to the economic crisis we were experiencing some renewed vigor in the segments that had been hardest hit by the spike in fuel prices. Our best guess is that those gains will be forfeited in the near future as the poor business climate and seasonal stagnation take their toll. We’ve already seen a “back-to-reality” movement among those highly fuel efficient vehicles that had captured consumers’ fancy until there were no other delusional retail buyers left out there willing to pay the exorbitant prices necessary to own such a vehicle. Most of the more mainstream economy segment should hold up quite well in the near future as we expect very little supply in that segment and continued reasonable demand.

We continue to think that relatively high levels of lease terminations among the European and Asian luxury segment will overwhelm demand and that that market segment will remain weak. One wonders, however, how cheap these vehicles can get before they begin bumping up against the near luxury segment. When you can buy an ’06 Mercedes S350 for very similar money to an ‘06 Infinity M35, it gives one pause for thought.

While full-size pickups and SUVs had gotten so cheap they actually regained some desirability and accompanying price recovery in recent weeks, we think they will once again begin to falter as we enter the winter months and the sluggish economy forces consumers to pay increasing attention to fuel prices.

Of course all bets are off if the government doesn’t do something to jolt the economy out of its current dismal state.

Dan Galves

Market Stabilizes But Quality Vehicles Remain Scarce

The current used vehicle market has stabilized in many segments due largely to a general lack of supply and some moderation of fuel prices. The scarcity of product is largely due to a decrease in dealer consignment vehicles at auction due to a slump in new vehicle sales and a resulting lack of trade-ins as well as the willingness of many dealers to keep for retail vehicles they would formerly have deemed unsuitable for their lots. One of our auction consultants told us that one auction bigwig confided that while every successive sale seemed to set a new record for dealers in attendance, each sale also saw a similarly unprecedented lack of inventory for sale. Were it not for the sluggish economy and the seasonal decline we usually experience at this time of year we might expect to see a really robust market. As it is, we are seeing some general stability in what is usually a deteriorating market.

Specifically, those mid and full size SUVs and pick-ups that were almost ‘unsaleable’ in previous weeks are actually attracting some attention among dealers and apparently among consumers as well. The other side of the coin is that some of those economy cars that have seen an uptick during what are normally very sluggish summer months are beginning to experience some minor erosion. Those few vehicles, mostly hybrids, that have experienced significant increases in value over the past few months are coming back to reality. We think you will see some significant declines in cars such as the Toyota Prius and Honda Civic Hybrids over the next few weeks.

Scarcity has moderated the decline of sport coupes and convertibles recently and that trend will probably continue. The one segment that seems to have continued its relatively steep decline is the Asian and European luxury vehicle contingent. Supply still seems to be overwhelming demand in much of that market.

While we are certainly glad to see some relative stability in what has been a very difficult market to stay abreast of, we remain cautious for the future. It is, after all, almost October, after which of course comes November and December, traditionally weak months in the wholesale calendar. Scarcity of product, however, may very well moderate the severity of declines we are used to seeing over the next few months.

A Shift in the Market

There has been something of a positive shift, or at very least some stabilization, in certain of the more volatile used vehicle market segments in the last couple of weeks. As usually happens eventually in these type of unusual market conditions brought on by specific economic factors such as a spike in fuel prices or a tightening of restrictions among lenders, the shortening of supply and severely eroded market value of the hardest hit segments eventually find a level at which there is enough demand to create some competition in those segments that have gone begging for the past several months. Such seems to have happened among the hard hit full size SUV and pick-up segments in recent days. A lack of trade-ins, institutional selling, and consignment sales have curtailed the supply in these segments. At the same time, dealers and consumers have come to the conclusion that these vehicles have become so cheap compared to some other related market segments (mid-size and compact SUVs and pick-ups) that they have actually become more desirable as well as harder to find, conditions that eventually add strength to a weakened market.

So you will find some stabilization among these segments in our current editions and even some increases among certain of the vehicles. We consider that a positive and hope that it will bring some calm to what has been a highly confused market. As long as the supplies stay relatively low and the values continue to be sufficiently depressed versus the more fuel efficient competition, things should remain somewhat stable. The most likely threat to this welcome respite would be a significant spike in supply as it looks as if fuel prices are moderating a bit.

Fuel efficient vehicles continue to be inordinately strong. Certain hybrids that are in extremely short supply new (Toyota Prius and Honda Civic in particular) have spiked in value to what we think is an extreme (ridiculous??) degree, but such is the reality of the marketplace. Other fuel efficient vehicles in short supply new (Mini Coopers come to mind) are almost as strong, relatively speaking, as the hybrids. A 2006 Mini Cooper S is worth about the same as a comparable BMW 325 or a Mercedes C280, both of which cost at least as much as $10,000 more than the Mini when new. A base Mini of the same vintage is worth the same as a comparable Cadillac DTS, which cost about $20,000 more when new. Such is the craziness of the market we inhabit. Where applicable among the same models, 4-cylinders are worth as much or more than 6-cylinders, and 6-cylinders as much or more than 8-cylinders.

The rest of the market remains pretty stable for what is normally a slowly declining late summer market. Convertibles are eroding a bit more quickly in general and the European luxury segment continues to erode, especially among the more expensive and gas-guzzling models, but not as rapidly as in the recent past.

Rising Fuel Prices

You may be noticing that as fuel prices are increasing, the spreads between 4 & 6 cylinder engines and 6 & 8 cylinder engines have been diminishing or disappearing altogether.

As vehicles age, their original cost differences give way to “the law of supply and demand,” and demand for fuel efficiency over performance has created a situation where the market is definitely favoring fewer cylinders where available.

So a 2005 8 cylinder Mercedes Benz ML 500 that cost almost $8,000 more than the 6 cylinder ML350 when new is worth only $400 more in today’s market. Similar situations exist among vehicles like 4 cylinder vs. 6 cylinder Accords, Camrys, A4s, Sonatas, Mercedes C-class, Jettas, etc., and among 6 cylinder vs. 8 cylinder vehicles like Audi A6s, BMW 5-series, Infiniti M-series, Jaguar X and S-types, Mercedes E-class, Lexus GSs, etc.

In some cases, while we continue to show ADD’s for larger optional engines, it has become necessary for us to remove the dollar amounts on these ADD’s as our way of urging some caution when dealing with these larger, more fuel-thirsty vehicles. The V8 ADD’s on Grand Cherokees and 4Runners are just a couple of examples of this. And while we have not done the same thing in regards to diesel/turbo diesel ADD’s (despite being told by some dealers we actually should) we have been significantly decreasing the ADD amounts on these vehicles over that past couple of issues. We expect these declines to continue unless things change dramatically in the near future.

As you might expect, on the opposite side of the spectrum are the hybrids, compacts and sub-compact cars that have all come to the forefront of the public consciousness lately and this strong demand has of course forced values to increase on most of these vehicles.

In short, when it comes to cylinders these days, less is more.

The Unusual Spring Market Continues

I’m not sure if there are pockets of stability in an unstable market or pockets of instability in a stable market, but the resulting “mixed up” spring market exists no matter which position you take. There are areas of the market that are quite stable: primarily the economical gas sipping vehicle segment, the under $12,000 or thereabouts price segment, the relatively rare domestic car segment, or some combination of the above. Instability and a continued depressed market still exists where there is an over-supply of product or severely diminished demand most often related to fuel consumption or a combination of the two. So European luxury cars and SUVs (and Asian luxury products to a slightly lesser extent because of lesser volumes) and all but the unusual and/or exceptional full-size SUVs and pickups continue to decline in what is typically a stable period for those products. 

An example of the precipitous decline in the European luxury segment is the BMW 525. Normally you expect vehicles to depreciate less as they age, so you would expect a 2005 525 to have depreciated more from April ’06 to April ’07 than from April ’07 to April ’08 as it aged. In fact, that is not the case.
       TOTAL DEPRECIATION
           April 2006 – April 2007: $6600
           April 2007 – April 2008: $7700

This is a highly unusual occurrence and illustrates the weakness in the market for even such generally desirable products as the BMW 5-series. You can find similar examples in the other depressed segments such as full-size SUVs and pickups.

So I guess it is a somewhat stable market in the sense that what has done well for the past few months continues to hold up and what has been weak continues to erode, though at a reduced pace. I suppose there will come a time when those weaker market segments will find their low-water mark, but thus far they do not seem to have reached it. There are definitely some bargains out there and consumers tend eventually to discover them. When an ’05 BMW 325 gets in the same price range as an
’05 Accord EX 6-cyl., as is currently the case, retail buyers often respond by succumbing to their emotional side, and as much as I respect the Accord it doesn’t move me, nor I suspect most consumers, nearly as much as the 3 series Beemer. Even the Jaguar X-Type gains some serious consideration when it can be bought for a couple of thousand less than a comparable Accord (and you get AWD as a throw-in!).

Most convertibles and sport coupes are holding up but not experiencing the kind of hyper-activity that is typical for this time of year. Minivans are experiencing something of resurgence as consumers are reawakening to their more practical aspects. The domestic and import market for 4-cylinder cars has been relatively good all along but seems to have spiked recently and many of those more ordinary, mainstream cars will see an increase in value.

Galves Values & Auction Data

We frequently get asked if we consider auction results when determining our Galves values. We do, and what we think sets us apart from other valuation guides in this area is that our professional consultants, who have typically spent decades in and around auctions, are experienced enough to interpret the auction data – taking into account a variety of factors that can distort pure auction results- in a way that is more useful and realistic for our subscribers.

What distorts auction results?

“No Sales”: Probably the most important of all the factors that distort the used vehicle market as reflected in auction data are the large numbers of unsold vehicles, particularly at the elite auctions, that are NOT reflected in auction results. Most of these vehicles are unsold because there were either no bidders or the final bids were not sufficiently strong to warrant a sale. In either case, they did NOT reach what the owner perceived as their market value and, in fact, suggest a lesser market value than those that were sold. Currently there are lots of “no sales,” particularly in certain market segments (late model full size SUVs and pick-ups as well as the European & Asian luxury market). We recently tracked one manufacturer’s full size SUV and pick-up offerings at an elite auction and out of approximately 170 units, less than 25% were sold. That kind of sales percentage is not unusual, especially among the ordinary dealer consignment offerings, and yet that weakness is NOT reflected in the auction data.  To look at an auction sheet without considering “no sales” can be dangerously misleading. 

Export markets: Those vehicles that have export value and happen to meet the specialized criteria in terms of color, equipment, and production dates can be worth thousands more than the same vehicle that does not meet the export criteria, thus distorting the market. In addition, mileage is usually a “non-issue” on exportable vehicles and that can skew auction results even more.

Seller incentives: Institutional sellers often offer incentives in the form of cash, floats, or buybacks that can severely inflate the prices of vehicles sold at auction.

Certified programs: Vehicles that qualify for manufacturers’ certified programs, especially those pre-qualified, often bring exceptional (and distorted) prices.

Color and equipment preferences: Certain color and equipment combinations can add significant value and can misrepresent values for lesser equipped vehicles of the same type. Details regarding important optional equipment are not usually included in auction data.

Elite sellers: The elite auctions all have a variety of elite sellers whose business model is predicated on having acquired over the years optimum exposure, reputations, and sources for high quality and often unique vehicles. Their vehicles typically bring significantly more than what would reflect a normal market.

So yes, we certainly do pay attention to auction results, but with the understanding that it is a useful component of our evaluation process only if tempered by an understanding of some of the shortcomings- distortions – of the data. Fortunately our consultants are professionals and they are aware of the circumstances that can distort this information and they take into account those factors when considering auction data.

Market Update: April 4, 2008

While the same basic economic conditions still prevail(see: “The Spring Market: a Perfect Storm?” below)and continue to affect the used vehicle resale market, there seems to have been some stabilization in those market segments hardest hit by the supply/demand imbalance over the past couple of weeks. It also appears that those market segments that were performing reasonably well previously may have gained some additional strength during the same time period. To some degree the market conditions are self-correcting. The supply diminishes as people refrain from trading in vehicles – or dealers refrain from selling vehicles – for the meager dollars they are being offered and the demand for such vehicles increases as their transaction prices become lower. So the decline in the hard hit European and Japanese luxury vehicle segment has slowed (we are not yet ready to say it has stopped or turned around), and the same is true for the weakened full size SUV and pick-up markets. At the same time the more economical and efficient smaller vehicle segment and the harder to find lower price range vehicles have gained in strength and may have increased in value in some instances. Both of these positive trends – a slowing of the decline in the weakest segments and a strengthening in the previously stable segments – will be reflected in the upcoming books where appropriate. We still recommend caution, however, in being overly optimistic in either case and in assuming that these recent trends are the norm for the duration of this unusual market.    

The Spring Market: a Perfect Storm?

We are currently experiencing what, for me, is an unprecedented market for this time of year. While I was not expecting as long and strong a spring market as last year’s, neither was I expecting the weakness that we are currently experiencing in what have been some of our most active market segments for the past several years, namely pick-ups, full size SUVs, and luxury cars.  

Like the formation of “the perfect storm”, a variety of factors have conspired to create this unusually difficult market, any one of which by itself would not have affected the market significantly but together have had a huge impact. Gasoline prices, the housing slump and mortgage crisis, a weak stock market, a shrinking job market, strong rebates and incentives in the face of slow new vehicle sales, global warming and the “greening” of vehicles, increasing rate of inflation, an impending presidential election: any one or two of these might have caused a ripple in the spring market, together they have caused a rising wave. 

A brief overview of the areas of strengths and weaknesses in the current market serves as a reminder of just how much the used vehicle market is a function of supply & demand. Find the segments with the greatest supply and least demand and you will pinpoint the weakest markets. Full size SUVs and pick-ups have dominated new vehicle sales for the past several years. Now, they are returning to the market in large numbers as their owners move on to something else. Gas prices and ecological considerations – to say nothing of the fickle need of us humans for something “different” – have pushed them largely out of favor as of late and demand for them has plummeted.The only thing that will promote the sale of all but the most unusual of trucks is a price that makes them irresistible. When you can buy that ’04 Chevy Tahoe for $2000 LESS than an ’04 Toyota Rav 4, who cares about the price of gas and what the neighbors think. The same can be said for the luxury market, especially the European segment. They sold/leased a ton of them in the past several years as we experienced a strong economy and were largely insulated from the spectre of global warming. A year ago a 2 year old (a 2004 model) Mercedes E320 sedan was worth around $26,000. Today the same 2 year old vehicle (a 2005 model) is worth around $22,000, or $4,000 less. That savings will buy a lot of gas and ease a person’s ecological conscience as well.  There are bargains out there and they are largely a function of supply overwhelming demand in certain market segments.   

The same law of supply and demand dictates what is doing well in the market. American cars, for example, are both relatively scarce and cheap compared to their imported counterparts. This means they are in some demand due both to their scarcity (especially in the northeast) and fit into that under $12,000 retail market that is also in demand. So the same 2 year old (2004 model) Buick LeSabre Custom that was worth $8200 a year ago is worth $9000 today (2005 model).  

The point is that this is a very unusual and difficult market for all but the most desirable vehicles. It is a time when a guidebook must function at its highest level in order to stay abreast of the marketplace and provide their clients with information that will enable them to function optimally in spite of the unusual circumstances. In the course of my responsibilities as editor I have become very familiar with the other appraisal tools available to the industry and I can say with confidence that no other used vehicle appraisal tool is as current or accurate, and therefore “useable”, as Galves. In my opinion that includes actual auction results which, though clearly useful and relevant, have to be interpreted with an understanding of condition variation, color preferences, equipment penetrations and values, export markets, special marketing incentives, elite sellers, and, probably most important, a real sense of the preponderance of “no sales” for certain vehicles. The reality is that most ordinary consignment dealers are lucky to sell one out of every three vehicles run. We take into account all those variables when we consider auction results and use them as part of our valuation resources. If you don’t, you can be seriously misled by auction information.  

We recognize that our traditional trade-in perspective is representative of the lower end of the wholesale used vehicle spectrum and can be conceived of as being “low”. We added the “Galves Market Ready” value as an effort to represent a higher level of the wholesale spectrum and give dealers a useful tool when dealing in those higher levels. If used and understood properly, we are confident that no valuation tool is as accurate and current and useful as Galves. Given the current difficult market conditions we are particularly committed to staying on top of the market and continuing to protect our subscribers’ downside while still reporting a level of pricing that makes it possible to buy, trade & sell effectively.

Dan Galves